When I think back to the days of my financial illiteracy, I always land on the same conclusion. We didn’t know where our money was going. I used the blanket excuse “we are broke” everytime we had to figure out how to pay a bill. Three words were enough to put the real problem out of mind.
Let’s take a look at what Broke means.
Broke: /brōk/ having completely run out of money.
Synonyms: penniless, moneyless, bankrupt, insolvent, ruined, down-and-out, without a penny to one’s name, without a cent, without two pennies to rub together
In reality, we were far from broke, we had two pennies to rub together (we still didn’t do it, but we could). We had stable jobs with decent salaries. Our “brokeness” was self-inflicted.
We weren’t broke, We had a spending problem
Are you spending too much on clothes, eating out, or vacations? Are you using money as a tool to make you happy? Do you actually know where your money is going every month? Do you know the answer to any of these questions?
Blindly spending money without considering what you are actually getting is a huge problem.
A problem that is compounded (not the good kind) if you don’t even realize you have one. In order to improve your financial position, you need to ask yourself a very important question.
What do I spend my money on?
Seems simple enough to people who are in control of their finances, but in reality, even people who seem to have everything figured out don’t know how much they spend month in, month out.
Before we go too far into this, you may want to do the exercise from my “How Complex is your Financial Map” post. It will show you all the different accounts your money is flowing through.
Our Monthly Money Breakdown
Below is a breakdown of our monthly cash flow. I prefer to track our after-tax income so we can see what we are doing with the money we have control of.
I am not going to review everything in detail, pie charts are an easy read, but I will breakdown our Everyday Expenses slice since a lot goes into that.
- Groceries – $350-400, Kind of expensive for a family of 2 (+ dog food), but we buy what we want.
- Gas – $100, We save a ton of money every month using public transportation but traveling to see family pumps this up on average
- Household Expenses – $200, varies heavily month to month (includes lawn maintenance, furnace filters, and general household/personal goods)
- Gas/Electric – $150
- Eating Out – $150 – 200, We eat out or go to breweries on a regular basis (might change with the baby here)
- Work Expenses – $100 – 300, Reimbursed expenses that we use personal credit cards for.
I could get more granular on some of the expenses, but I don’t see that much value breaking everything down to the exact penny. Its one of the reasons I don’t use a budget.
While I am proud of our monthly cash flow today, it hasn’t always been so pretty.
What was life like before we were financially literate?
A few years ago our breakdown looked something like this:
I remember how much my student loan and our mortgage payments were because I was stressed out about paying them every single month. When money is tight, big expenses stick in your head.
Outside of that, I didn’t know shit about our money.
We had no clue how much we spent on groceries or eating out. We weren’t planning ahead for irregular expenses. I knew we paid bills every month, but I didn’t know how much of our income went towards them.
I do know we ate out way too much (2-4 times/week for lunch alone). We went out to Happy Hour too often. We spent without thinking ahead.
If we wouldn’t have started reviewing our spending, we would not be anywhere near where we are today. Get tough on yourself and ask “What do I spend my money on? Am I actually Broke?”
How to Start Tracking Your Money
In order to make improvements, you need to know where your money is going today. If you are unsure how to start doing that, my process is outlined below.
Bills and Monthly Statement Review
Grab the last few months of your credit card and checking account statements. Go through them line by line and categorize what you spent your money on. You can use the same categories I use or go more granular if you want a clearer picture.
Next, get all of your bills together (this is where the Financial Map from above may help you) and take note of the amount each month. For irregular bills (water/heat/etc) get an average of the last year.
Personally, I use excel to track all of this, it makes the calculations easier
If your review is anything like mine, you will find line items that you don’t remember. I end up googling the name of charges to see what business we spent money at. Sounds crazy but there are obscure names for popular companies.
This exercise is also a great time to see if you were overcharged or have any security/identity theft issues on your accounts
Figure out the Percentage and Review
I look at each expense or transfer against our monthly after-tax income. To get the percentage all you need to do is divide the monthly expense by your monthly income:
Mortgage ($1600) / Monthly Income ($6,900) = .231 or 23.1%
Once you calculate all the expenses, look through them and see if anything stands out. It’s up to you to decide what is too high, but you can start by setting monthly or quarterly goals to reduce certain expense areas.
If you are going into debt each month, your percentages will add up to over 100%. You don’t want to be spending over a 100% of your income, its time to do something!
Feel free to send me any questions through my contact page.
Do you track your spending? If so what method do you use? If you don’t, why not?