Tuesday, April 24, 2018

Financial Education 201: Look at Your Spending

This can be painful. If you aren’t really saving any money, like you are 30 with no retirement savings, or don’t have even $3000 to put down the minimum 3% on a house, it might hurt. You can look at your debit and credit card statements to see where the money is going. You can use Personal Capital or mint.com to track your spending too. I recommend one of the websites because it can spit out what you spend on average every month over the last 12 months, and that’s as honest as it gets. 

The reason this is important, even if you only do it one time, is that you will inevitably see some expenses that are disproportionate to the value you get out of it. For example, it’s not uncommon to pay $100 per month for cable, and yet only spend one or two hours a day actually watching television. Cut out one recurring bill like that and you suddenly have $100 that you can save every month. Subscription services are a great example of something that you might not get the value out of now as you once did. 

There are plenty of personal finance sites that will go to the extreme when it comes to finances, going so far as move to a low cost country to reduce expenses or eating a lot more Ramen. There are many valid points about how to reduce your spending, but I'm only going to focus on the big three, and some experts only talk about the big two.
  1. Housing is typically the largest expense that most people have. If you can reduce the cost of your housing you will come out way ahead. When I lived in Iowa a good friend of mine was paying $800 a month for an apartment without a garage. I paid $450 for my smaller, older, and a little more run down apartment, with a garage. That’s $350 a month that I was able to put toward whatever else I wanted to, such as climbing Mt. Everest. Looking at one month at a time, it may not seem huge, but over the course of a year that’s $4200 in after tax cash for not a huge difference in deliverables, which is to say, a place to eat and sleep for a single guy. 
  2. Transportation, more specifically your SUV or car, is probably one of the largest expenses you have too. Between the car loan interest, the depreciation, gas, oil changes, tires, and inevitably repairs, vehicles cost thousands of dollars a year. I drive a Honda Insight that I paid for in cash that gets about 48 miles per gallon, and I still spend about $1000 a year on gas alone. Point being, if you can reduce the cost of your transportation, you will save more money.
  3. Food costs money. Strictly speaking, this may not be a big part of your budget. It is entirely possible for a person to eat well on $100 a month. However, it is also possible to spend $100 in one day on three meals out and several drinks at the bar. I am a huge fan of going out to eat. I’m also a fan of eating in, but I don’t have a dining table, so I really don't have guests over very often. Yet, going out to eat quickly gets expensive. It’s hard to have a dinner meal for myself, with a glass of wine, at a restaurant for less than $30 including a tip. While I like going out, going out four nights a week can become an expensive hobby. Not to mention lunches, breakfasts, and the vending machines. Point being, substitute a meal at home every week for a meal out, or bring your lunch to work sometimes, and you can save money. Also, read the labels at the store and try the generic brand items. Wal-Mart has this Great Value brand rising crust supreme frozen pizza for $2.78, it tastes good and it’s huge! I usually cut it in half and it makes two large dinners for me. I could probably even stretch a single pizza to four meals if I was not running a lot. It’s amazing what buying a few generic brand foods can save you.

There are other ways you may be spending a lot. Perhaps retail therapy, perhaps you are into shoes, perhaps you get disappointed when you don’t have a package from Amazon when you get home from work. I don't know what your personal situation is, it is personal finance after all. The idea is to find your highest expenses, and reduce them a little.

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