The next step on your financial journey is to figure out where your money is going. You are in control of this. If you’re hoping that you have enough at the end of the month to pay your bills, your money is in control of you. It has to be the other way around. Another major benefit of websites and apps like YNAB is that they track where your money is going, what you are spending it on and how much money is coming in. This is called a budget. I know, the dreaded B word. I’m here to tell you that it doesn’t have to be a chore or a bore. It doesn’t have to be an everyday thing where you are constantly checking it. Let’s just refer to it as tracking your money. It’s important to track where your money is going to ensure that you are spending it on things that bring you joy, happiness and positive experiences. To ensure you’re spending it wisely on things that actually bring pleasure to your life and that enhance your life.
Have you ever thought to yourself, where did all my money go? So many people just coast by and have no idea what they are actually spending their money on. And poof, it’s gone. They complain about taxes. They complain that they haven’t saved for retirement or that they can’t get ahead in life. I’m telling you if you track your finances for a few months, you will know exactly where your money is going and you will have more of it.
The simple goal of this tracking process is to get to a place where you are earning more than you are spending. It’s that easy. That is the only way your net worth will grow and that is the only way you make progress in this journey that will lead to a more successful and fulfilling life. It is the only way you can save for that down payment, that car, that wedding, that retirement. It is the only way you get to a place where you can give your money to a charity that is close to your heart, to help someone in dire need or to ensure your loved ones are taken care of. Maybe you’re not at the point where you are earning more than you’re spending and that’s okay. But you have to track it to see where you’re at, regardless if it looks good, bad or ugly. If you’re scared to even see that number because you know it’s going to be a disaster, look at it this way. The uglier the better. There is no place to go but up and you can look back to this point with pride when you scratch and crawl your way to victory.
I want to ensure that I’m not spending money on things that don’t bring me joy or that enhance my life. Obviously, there are things that we have to spend money on that are a must and that don’t necessarily bring us joy. These are essential things that are called needs. Those include: water, taxes, electricity, food, shelter, clothing, and vehicles. These things all belong at the top of your budget. These are non-negotiable categories that have to be paid for above all else. These are your bills. The rest of those needs that you think are needs, such as: Netflix, alcohol, online shopping, restaurant food, cable tv, etc, are not needs. They are wants and are considered negotiable. Those categories go below your “need” categories in whatever order you feel they belong. The lower they are, the more likely they can be trimmed down or cut out completely, until you are in a better place financially to afford all of these things. There is nothing inherently wrong with any of these things and you should absolutely strive to have them if they bring joy to your life. However, depending on your current situation, the only way to earn more than you spend, you may have to cut some of these things out temporarily. It all depends on where you are at in your journey.
So logon to YNAB or another budgeting tool or start a spreadsheet or put pen to paper and get your categories listed out. YNAB and other tracking apps allow you to link your bank accounts so that your spending is automatically put into these categories. This will save tons of time and energy. But feel free to do it however you’d like. If you’re a spreadsheet person, go for it.
Once you have your categories listed, track it for a month. For right now, at the start of the month, just estimate how much you think you will spend in each category. Make your best guess. You can adjust it at the start of month 2. At the end month 1, you will see how much you’re earning, spending and where your money is going. It’s a simple equation.
Income minus Spending = Money Left Over
If I earn $5000 and I spend $10000, I am at -$5000. I am $5000 poorer than I was at the beginning of the month and my net worth has dropped that same amount (give or take).
If I earn $4000 and I spend $3500, I have $500 left over. I am $500 richer than I was at the beginning of the month, If I continue to consistently do that for 12 months, I will be $6000 richer by the end of the year.
These are just examples, but you get the point. You need to strive to reach a point where you earn more than you spend or you will never succeed financially. You will always be in debt, always have a car payment and always wondering where all your money went. You will continue to dig a deeper hole until you start to figure out where your money is going.
So how do you start to make progress? After month 1, you’ll find out how much money you have left over (if any). Adjust your estimated budget for month 2, based off how much you spent in month 1. If you are spending more than you earn, you’ll need to make some tough decisions. What will you trim down or cut out completely? That will be up to you. I can’t do it for you. You need to be intentional with your money and decide what brings you joy in life. If you’re early on in the process and are drowning in debt, you might not be able to afford some things that bring you joy and that enhance your life. That is the ultimate goal but I recognize that most people are not there yet. So look at your spending and trim it down as much as possible so that you are making progress.
I can’t tell you how much to spend on each category, as that is up to you and your situation. I can give some recommendations on things that can make a big difference when it comes to saving.
Restaurants – Look at how much money you’re spending at restaurants. This was a huge eye opener for me when I started to track my expenses. It’s likely very high and can likely be trimmed down a bit. Are you eating out 4, 5, 6, 7 times a week? This is a great place to start if you are looking to cut some costs. I’m not saying don’t go enjoy a meal at a nice restaurant. I do this at least once a week. This is one of my favourite things to do. Enjoying a nice night out with my wife brings me joy and enhances my life and our relationship. But grabbing greasy fast food while at work because you didn’t take 5 minutes in the morning to pack a lunch is not my idea of joy or enhancing my life. And there are people who do this every day of the week and wonder why their bank accounts are empty, their pants don’t fit and their life isn’t going the way they would like to. Pack a lunch for work. Eat breakfast before you leave. Do everything you can to trim this down as much as possible. Run your day. Stop letting it run you.
Shopping/Clothes/Things – If money is to buy things that bring you joy and enhance your life, then you need to focus on buying things that will do this. It needs to be about you and not about anybody else. Dave Ramsey regularly states, “We buy things that we can’t afford, with money we don’t have, to impress people we don’t even like”. In other words, don’t buy things because you think it will bring you status or feel like you need to keep up with the Jones’s. Buy things that enhance your life, that bring you joy and that lead to great experiences. It’s that simple. Stop buying things to impress people! People don’t care. Other people are so wrapped up with what’s going on in their lives, that they don’t even notice that you drive that $80,000 truck. And even if they do, they don’t want to be you. They just want to drive a truck like yours. They’re not thinking, “Oh I want to be like Jay and drive that brand new truck”. They’re thinking, “Wow that’s a nice truck. I want to drive a truck like that”. Some people look very rich based on the amount of things they own. Their clothes, their house, their car, everything screams that they’re rich. And maybe they are. But many people are drowning in debt, stressed out, and unhappy, just to make it look like they’re crushing life. That is no way to live.
Regardless of what you are spending your money on, it is very important that you start to track it. I highly recommend the app YNAB. We think about money so many times during the day. It is so important to our daily life and our future. People spend an hour on social media every day but they don’t have time to take 10 minutes to download a budget app and set it up? If money is so important to everyone, why can’t we prioritize tracking it? It’s time you take control of your money.
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