“Can I afford it?” is a question you may find yourself asking more often than not, especially if money is a constant stress in your life. In this post, we narrowed down three approaches that we have found to be effective in knowing how much money is coming in and how much money is going out each month. However, we encourage you to experiment with different methods (even the ones not listed here) until you find the one that works best for you.
Managing your money on a consistent basis is crucial for your financial well-being. It’s not just about budgeting, but rather understanding your lifestyle expenses, spending habits, and financial priorities. By gaining clarity on where your money is going, you can make informed decisions about:
- What you can and can’t afford.
- How much to allocate to paying down debt.
- How much to save and invest to reach your current and future wants.
Where to Begin
To gain clarity on your lifestyle expenses, start by examining your current spending habits. Avoid guessing and take a close look at your bank transactions and credit card statements. Don’t forget about Venmo or other payment app transactions. While going through your spending you may feel some discomfort and even shame. That’s normal but don’t get discouraged. Even though you can’t change the past, you do have control over the decision you make going forward. The goal at this point is to have an awareness of where your money is going. With that information you can begin to make small adjustments to get closer to living the life you want. Read on for our recommended systems to track spending.
Method #1: Year-End Credit Card and Bank Statement Review
This is the least time consuming method. Gather all your year-end credit card and bank statements (note: many credit card providers will create a year end summary of your annual spending). Then, total up all the expenses for the year to come up with an average monthly discretionary spending number. For example, if you spent a total of $54,800 on your credit card for the year, plus an additional $10,000 paid by Venmo and cash/check, your total spending for the year is $64,800 or $5,400 per month. Now, take a close look at the categories on the year-end summary to gain awareness of where your money is going. Are you surprised by any particular category? Are there opportunities for adjustments?
Method #2: Manual tracking and budgeting apps
While this method may require more effort, it can be highly effective, especially if you struggle with impulse spending or tend to overspend. You can start by using a simple cash flow spreadsheet to manually track your spending and plan for the months ahead. Alternatively, you can utilize budgeting tools like Mint, which automatically syncs your bank accounts and categorizes your transactions. Another option is known as the envelope method, where you assign every dollar a specific purpose. Apps like You Need a Budget (YNAB) replicate the envelope system to help you plan ahead. It allows you to allocate a certain amount to each envelope or category, such as bills, groceries, savings, and entertainment. YNAB is the system I use and can say from personal experience, there is a learning curve in the beginning when using the app. Once you get the hang of it, it really can keep you on track with your spending. Whether you are doing it manually or using an app, consistently looking at the numbers and planning ahead can aid in maintaining discipline and awareness of your spending limits.
Method #3: Pay Yourself First
If you already have a good understanding of how much you should be saving, consider the “pay yourself first” method. Automatically contribute a certain percentage of your income to savings before allocating the rest for spending. You can set up automatic transfers from your paycheck to separate accounts, such as checking and savings, to ensure consistent savings. Once you’re confident you’re saving “enough”, spend the rest as you wish.
Don’t Forget About Non-Monthly and One-Time Expenses
Remember to account for non-monthly and one-time expenses in your lifestyle costs. These may include vacations, car maintenance, kids’ summer camps or other inconsistent items. Plan ahead and set aside funds in a separate high-yield savings account to cover these expenses without disrupting your monthly budget.
Stick to Your Plan
Creating a budget is not a one-time task; it requires ongoing commitment and discipline. Schedule a money date with yourself- we recommend once a month or once a quarter- to check in on your spending regularly and make adjustments as needed.
It’s common to feel overwhelmed or guilty about past spending habits, but remember that no spending is inherently good or bad. It’s about understanding where your money goes and making adjustments moving forward. Experiment with different methods until you find what works best for you, whether it’s manually tracking your expenses, using budgeting apps, or some combination of the above methods. Be patient with yourself and stay consistent, as you work towards better managing your lifestyle expenses.