Big-‘E’ #7 Expenses

Today’s Big-‘E’ is Expenses.

Most people would have expected me to start with this one rather than leave it to number 7. In fact, one person wrote on my Facebook WallThe Australian retailers must be writing asking you to stop. Everyone is saving their money instead of spending it.”

That’s very flattering but I don’t think I have quite that much influence over so many people’s spending & saving habits just yet! I’ll keep working on it.

Today’s message is about this very topic though.

What happens to your income? Are you in control of your Expenses or are they in control of you? Do you save any of your money so you will have the ability to generate income without giving up your time in order to do so, or do you spend it all and more?

You can’t be perfect!

Let’s start by acknowledging that it is not possible to be perfect with your finances so it’s OK if you’re NOT completely in control right now. The fact that you are reading this tells me you are keen to improve and willing to do something about it. That’s a really good start though!

Cost of Living

So, what I have noticed is that for 95% of people. “Their Cost of Living is determined by their Income”. They spend all they earn and as their income goes up so do their Expenses.

Pay rises come and go and nothing seems to ever reduce the financial stress. In fact it seems to be getting worse, not better. Prices seem to be going up faster than income and it seems to be getting harder to make ends meet.

Why is this so?

It would be easy to blame everyone else, the government, the GFC, the boss and so on but the fact is that in your street there is someone who earns less than you who is doing better financially than you are. And, someone else earns more and they are doing worse!

If you interviewed 100 people at random and asked them what is their income and do they ever have difficulty with money, their responses would show that most people have difficulty with money regardless of their income!

Value your Money

In Big-‘E’ #6 (Earnings) I said you need to place more value on YOU if you want to increase your income. Now I’m going to tell you that you need to place more value on the money you earn if you want to become wealthy.

7 Key Questions

When you are about to part with your hard earned cash, stop and ask these questions.

  1. Is what you are about to purchase a good exchange for the hours you worked to earn this much money (Is the benefit worth the pain you went through)?
  2. Could you pay less for the same benefit?
  3. Is there another way to get this benefit?
  4. Is this purchase something you ‘want’ or ‘need’?
  5. Do you need it right now? Before you spend $1 it has a million possibilities. Once spent it has one outcome! Make sure you don’t regret receiving that outcome over another.
  6. Do you really need it at all? (Have you ever said something like “I need a new car” but kept driving the old one? We are all good at telling ourselves stories!)
  7. If it is a ‘want’ rather than a need could you satisfy this emotion in a different way with a better financial outcome?

What is normal?

At a recent workshop I asked people to complete a sheet that listed 20 common household expenses. Their task was to enter amounts they thought were appropriate for an average family for each of the items and then tally up the total spend for 12 months.

When we looked at the totals, the spread for all the people in the room ranged from around $30k p.a. to $130k p.a.

Does this surprise you?

The amounts YOU think are reasonable for everyday expenses are not the same as the people around you. You might be feeling comfortable spending $50 at the butcher each week and yet someone else would be mortified if they spent more than $20. You might think it’s OK to spend $90 a month on pay TV and watch all the movies and sport while someone else watches a free movie on a Friday night and an occasional other program now and then and they spend their spare time on the week-end hiking and swimming and in the evenings prefer to interact with the kids, play board games, read books, go to meetings, play an instrument and learn a craft.

Always Other Ways

The important thing to note here is that there is ALWAYS another way of looking at everything. You might have read ‘play board games’ and nearly choked or you may be someone who would be happy to play board games. Your attitude is what makes the difference. (Pity it doesn’t start with an ‘E’ or ‘Attitude’ would be another of my Big-‘E’s).

There is ALWAYS another way to solve a problem.

For example, when I was 19 I had to hand my driver’s license in for a month because of a few speeding tickets I had picked up due to youthful exuberance. I should have had the problem of not being able to get to work or band practice or week-end events but I simply asked work mates to give me a lift to and from work and friends to take me other places. If that was not possible I simply rode my trusty old push bike!

And it is ALWAYS easier to make the more expensive choice.

For example, If you have money in your wallet and money in your account and you arrive home at meal time after a really hard day at work only to realise you forgot to take steps to prepare for your evening meal prior to leaving in the morning, most people will find it all too easy to ‘order in’, ‘take away’ or ‘dine out’.

If you put MOST people in the same situation but take away the money and it’s amazing how the choice to prepare a meal at home becomes so much easier to make.

A Different Angle

I am going to make it really clear here that whilst I am talking about being more frugal with your Expending, that is NOT what I specialise in. I have been on TV with the title ‘Budgeting Guru’ after my name and yet I don’t think I have ever written about how to save money on household items. There are plenty of web-sites you can go to for information on how to save on almost everything you could think of spending money on. I would recommend as a good starting place. This is just NOT what I do.

I prefer to look at the topic of budgeting from a totally different angle.

The one thing that I know for sure when it comes to Expenses is that it is easy to overspend when there is no roadmap and no plan but when you isolate your ‘must pay’ predictable expenses and project them forward into the future so you can see what is coming long before you get there, making other spending choices is a much easier task. Nobody else seems to have worked this out, or at least they aren’t talking about it!

Almost every time I speak to one of my Simply Budgets software customers I hear the same story. They tell me ‘this has taken away all the guesswork and all the stress’.

My Hot Tips

So to finish off for today, my hot tips for managing Expenses are:

  1. Set limits for your spending. E.g. allow a certain amount for food, fuel, entertainment etc. each week and stop when you have spent to your limit (to my surprise I discovered that not everyone does this. It is the most basic and crucial first step!).
  2. Identify your regular predictable expenses and prepare a 12 month plan to pay them on time every time, looking not only at the ‘how much’ but also at the ‘when’ so you always know how much needs to be set aside to meet those payments on any given day of the year (that’s what my Simply Budgets software does).
  3. List your essential aging possessions (fridge, car, washing machine, TV, Stereo etc) and prepare a 10 year plan to replace these items and put money aside for these as well (that’s also what my Simply Budgets software does). Note:- a $1,000 washing machine costs $2 a week if you have 10 years to save for it, $4 a week if you wait 5 yrs before starting and $20 a week if you only have 1yr left to go so start soon!
  4. If you know you are at risk of spending the money from 2 & 3 above on other stuff, keep it in a separate account. If the only money in the account you have easy access to is for your weekly expenses it is really hard to accidentally spend money you need for paying larger less frequent bills!
  5. Keep the 7 points I listed above at the top of your mind when you go shopping.

I could probably keep going on this topic for a lot longer than you have available right now. I think I have presented the key basics that will help you head off in the right direction though.

Happy ‘Expensing’!

David Wright