What do you spend your money on? Your mortgage/rent, food, utilities, entertainment, clothes, cell phone … what else?
Do you know how much you spend on each every month? How about your irregular expenses — what are they and how much do they cost?
Today is all about understanding your spending.
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Have you ever asked yourself: where’s my money going?
It’s an all-too-important question that many people unfortunately don’t know the answer to. Now that you’ve set up your account aggregator and categorized your spending for the past few months, you can see exactly where your money has been going.
Today, you’ll determine precisely what you’ve been spending money on, and break it down into three categories:
- fixed costs
- flux spending
- once-in-a-while expenses
First, let’s see where your money is going.
Chart Your Average Monthly Spending
You’ve already taken a quick peek at where your money has been going when you categorized your transactions, but it’s time to dig a little deeper.
Log back in to Yodlee and click on the “Spending Reports” tab. Choose the time period you categorized your transactions and click “Show.”
You’ll see your Expenses Analysis pie chart appear on the left, with the colors each category represents in the middle of the page.
What are you spending the most money on? Where might you be overspending?
Tomorrow, you’ll set goals for your expenses. Today, it’s time to determine which of your expenses can be automated.
List Your Fixed Costs
Using the spending report and categories, list out the expenses you pay a fixed amount for on a regular basis.
These could include:
- Mortgage/rent
- Loan payments (list each loan separately)
- Telephone/cable/Internet services
- Insurance
- Memberships (gym, club)
- Utilities
- School/education
- Childcare
So if you know that your mortgage is going to be $1500 every month, it’s a fixed cost. Same with your student loan; if it’s $150 every month, it’s a fixed cost.
How Much Are Your Fixed Costs?
Now that you have a list of your fixed costs, it’s time to tally how much they cost.
Using either your monthly bills or the spending analysis, add together each fixed cost on a monthly basis. This is your total fixed expenses, and the easiest amount to automate and anticipate.
Save this number — your total fixed expenses — you’ll use it again shortly.
Your Once-in-a-While Expenses
You likely have a few once-in-a-while expenses; you know — the commitments that pop up once every 6 months or yearly that may take a bite out of your wallet.
These could include:
- Insurance (auto, homeowner’s, renter’s)
- Membership fees (yearly dues)
- Charity donations
- Taxes
Once-in-a-while expenses have a tendency to creep up on you before you have the money ready to pay them. It’s time to stop that.
List your once-in-a-while expenses, over a full calendar year. Don’t miss those that you pay more than once a year. For example, if you pay your auto insurance twice a year, make sure to count it twice.
When you’ve totaled up your once-in-a-while expenses, divide it by 12. This is the amount you need to be setting aside each month to pay these bills. We’ll call this the once-in-a-while fund.
Determine Your Flux Spending Amount
Your flux spending amount is the amount of money you do not already have earmarked (or can reliably anticipate) for each month.
This includes expenses like:
- Groceries
- Entertainment
- Credit cards
- Clothes
- Dining Out
And, most importantly, savings!
In order to find your flux spending amount, use this equation:
Expected Monthly Income minus Total Fixed Costs minus Once-in-a-While fund = Flux Spending Amount
For example, if you have an Expected Monthly Income of $4500, Total Fixed Costs of $2000 and need to set aside $300 for your Once-in-a-While fund, you’d have $2200 for your Flux Spending Amount.
4500 – 2000 – 300 = 2200
Your number will be different from anyone else’s, but there’s one universal truth: if this number is lower than you’d like or even negative, you are spending more money than you can.
The number one rule of personal finance is to spend less than you earn. If you aren’t obeying this rule, now is the time to start.
No matter how big your Flux Spending Amount is, tomorrow we’ll make it bigger. Then you’ll have goals for each flux category, and more money to save each month!
TIP: Knowing your Flux Spending Amount each month puts you intimately close with your spending habits. When you think of every purchase you make as eating away at your total flux amount – and possible savings – you’ll make better decisions about buying things you want versus buying things you need.
