How to Manage Money
Not learning how to manage money can be devastating. Spending more than you earn is so easy to do. The small amounts seem so trivial and yet they can end up being really big amounts.
That five dollar coffee in the morning multiplied by five days multiplied by 50 weeks ends up being $1350 a year. That could be that vacation you are wanting, or the new computer. And it’s insidious. It owns you, it leads bleeds you dry. Five such tiny items can make your life a misery.
Does this mean you shouldn’t have any pleasurable things? Of course not – only that you need to make a conscious choice to have the things that are important and avoid the things you are buying mindlessly.
Cost of your current life
What is the truth about your current lifestyle and requirements? What are you spending every month? What are your basic necessities? Many fixed expenses like rent or house repayments, utilities, school fees, medical expenses are easy to work out. Find or estimate previous bills.
The next gathering exercise involves finding out how much you actually spend. Not what you think you spend. You can’t possibly manage money unless you know the reality. I don’t think anyone has ever accurately estimated how much they really spend.
Try it for yourself get a notebook and just jot down everything you spend for a month. Just note what it is and how much it cost. Don’t make judgments about what you should or shouldn’t spend, just record them. Collect the receipts or make a note of it.
At the end of the month put everything into groups. Like car expenses, child expenses, takeout food, coffee, lunch, clothes, food, toys and magazines.
It’s like cleaning out your wardrobe – you take everything out and put it into piles so you can see how many T-shirts, sweaters, jeans, socks etc you have. I did this once and found I had 25 T-shirts and three pairs of pants. Every time I went shopping I felt I had nothing to wear and would buy another T-shirt. Seeing how many I had though made it easy to let some of them go.
Same with the money spending reality check. You need to know what you are spending huge gobs money on. What are the proportions? Are you spending 40% of your income on clothes or food for instance? Then it’s easy to make decisions about spending on unimportant things.
The Joy of Budgeting
Managing your money can seem so utterly tedious. Like having to watch every calorie. But our negative associations to budgeting can easily be changed. Managing money doesn’t have to be painful. In fact can be fun. Sometimes all that’s needed is a reframe. Creating a spending plan instead of a budget.
If you don’t do this, the things that are important slip through your fingers. Think of it like reverse engineering. Start with what you want to create and work backwards.
A Spending Plan for getting a goal
What do you want?
I want a holiday in France can be come a tangible reality. How much exactly do I need for this? How long do I want to stay? What is the airfare? Where am I going to visit? What clothes do I need? How much time off work do I need?
Once you start to make this reality concrete and exciting, it provides the motivation to start the ball rolling. It also gives you a specific target. Imagine if you wanted to get lunch and weren’t sure what you wanted. But you headed off to the mall anyway and just checked in to every food place. By the time you found something you wanted, you may not have enough money or they could be sold out.
Having a specific target speeds up the process of getting what you want. Tim Ferriss talks about this in his bestselling book “The 4 hour work week”. He says we have fuzzy goals that we don’t cost out and can actually be much more affordable than we think.
Where are you right now?
Then you need to find how close you are to getting your desired holiday. Of course working out all your expenses and your expected income is where most people start. And get so depressed they stop will go back to the TV or the shopping mall. By starting with the end in mind, saving isn’t a sacrifice anymore – it has a purpose.
A Spending Plan for your life
Cost of your desired life
You can take the same approach to the kind of lifestyle you want to have. What do you need to live comfortably? Where do you want to live? What kind of transport, entertainment, opportunities would you like to pursue?
Take a step back and start from scratch. Imagine you have to plan a budget for an overseas client who has no idea about the cost of things.