Good financial management in part means getting your finances under control. Just like building a house, a solid financial plan starts with good foundations. Before you can begin to build a solid financial plan one part of your foundation is getting your finances under control. This article will focus on understanding where you are with your financial plan and practical saving as part of getting your finances under control.
Step 1: Know Where You’re Spending Your Money
It sounds quite basic that you should know where you’re spending your money before you can begin to get your finances under control, but you’d be surprised how many people don’t know where they’re spending their money. Many people think they know where they spend their money, but they’re most often shocked at where their money actually goes when they start tracking it. Before you can build a solid financial plan spend at least one month tracking everything you spend on an Excel spreadsheet or something. And I mean track everything down to the penny if you can. Keep all of your receipts, it will help you. Be sure to track what you spend your pocket money on as well. For example, on your way work in the morning you stop for gas. You pay for the gas with your credit or debit card at the pump, but you also go inside and grab a cup of coffee, a banana, and a muffin or whatever your breakfast of champions happens to be. You decide to pay for the stuff inside the gas station out of your pocket money. Be sure to get the gas receipt and don’t forget to write down the pocket cash you spent on the breakfast of champions.
After at least a month of tracking everything you spend your money on, you will have a good idea of where your money goes. You might be surprised that you spend $70 on junk food at the gas station, $30 on the snack machine at work, $170 dining out for lunch, $40 for newspapers and magazines at the magazine stand, which all adds up to over $300 spent on things you probably don’t need or could have saved on if you put some forethought into it.
Step 2: Now That You Know Where Your Money Goes, Start Trimming the Fat
Okay, now you know where your money goes by following step 1, but a good foundation also has solid core strength. Or just like your physical fitness, a lot of strength comes from your core. In fitness your core is the belly and surrounding area. What do most of us have around our bellies? That’s right fat! So in order to get into shape you need to trim the fat. Financial fitness can be a lot like physical fitness. We have all kinds of unnecessary fat in our financial diet. Just like the fattening junk food we eat that makes our bodies fat, we spend a lot of hard earned money on this stuff too. So not only is it fat in our diet, but the expenses associated with it represent fat in our financial diet too. Not to mention that we’ll end up spending more money in the long run if we eat unhealthy, but maybe I’ll save that topic for another article down the road.
Anyway, what I mean by trimming the fat is to look at where you’ve been spending your money and look for things that you could cut out of your spending habits, or at least try to save on them. If you really like reading the newspaper every morning you might be able to save with a subscription plan, or sometimes the newsstand is charging the same price as the subscription, but you might be able to save with an online subscription plan. Or maybe you could bring lunch to work instead of eating out. If you brought your lunch to work four days a week and ate out only once a week you could probably save $1,200 a year or more. The point is to look for ways to save on the items you use, or look for things you probably just don’t need.
In Solid Financial Planning: How to Get Your Finances under Control Part 2 we’ll focus on building a budget. I’ll also have an Excel budget template you could use to help you track how well you did against your budget.
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