I often listen to my friends who complain that they run out of money well before the salary date. When I dig deep they always say their salary isn’t enough or they’re not getting any bonuses. I know the feeling. I have been there; done that. But hate to break it to you, you are probably wrong! Before skipping into the comments, hear me out.
If you feel like you have no control of your expenses, in this post you’re going to learn how to track what happens to your monthly income and take control so that you don’t feel lost.
Why do you feel like your salary is never enough?
We think we are rational in our spending habits but most of us are far from being rational. At least not as much as we think we are. I mean, did you really need that latest iPhone? I am not here to ask you to be 100% rational when buying stuff which is ridiculous. We are evolved not be very rational. It helped us to survive millions of years. But can we win the modern life only with basic instinct? Maybe not.
Ok I get it, but where should I start?
Even if you have defaulted credit card bills, taken personal loans and car leases, you can do things to take control of your expenses and have financial freedom. All you need to do is start today, because you will never be younger than today.
The first step towards financial freedom is to track daily expenses. This will be your keystone habit towards a lots of good things coming in your way. Once you have the habit of tracking expenses, we can talk about the next steps. Eventually we can gain financial freedom or early retirement. That’s a topic for another article.
Track your daily expenses
There are several ways you can track your expenses. I know a senior Manager who records all his expenses in a book. Few years back I used an Excel spreadsheet to track my expenses. It was alright but I missed some expenses. But now I am using a simple mobile app (Google and Apple). It is much more convenient and it provides me all the tools needed.
The data is automatically synced to my Google Drive. It can be exported as a spreadsheet when I need to analyze the details. As an example, I can tell you how much I have spent on fuel last year. I have given a screenshot of my last month expenses. As you can see, this gives me a snapshot of monthly expenses. If I need to, I can go into each category and see each expense.
Whenever I talk to people about the importance of tracking expenses, everyone agrees. But very few act consistently. Just like any habit, tracking your expenses daily is difficult. It’s easy to do once or twice, but it’s difficult to do for a year. Let me give you a simple plan which will take only a minute per day.
- Keep it simple
Don’t worry too much about categories and all the other features that comes with the Mobile app. You can adjust and use all the features later. But make sure you add your expenses daily. I don’t recommend adding your income. Just the expense would do.
- Don’t be precise
You are not here to balance the accounts. You can round the numbers and add approximate amounts as you remember. You don’t need to keep all the bills and receipts with you.
- Do it at the same time everyday
Decide early on when you are going to do it. Is that before going to bed? I prefer to do when I am commuting to work. Doing it every day at the same time will help you to form a habit.
Review expenses monthly
Once a month, make space to review your budget. Take no more than 30 minutes. You don’t need to go through the entire list of expenses. But look at the category expenses. Are you comfortable with the amount you have spent under each category? If you are doing this for the first time, get ready to be surprised at how much you spend. In some months, I have been amazed by how much I spent on my car. Like fuel and repairs. Having a clear idea of how much you spend on everything is the first step towards having financial freedom.
The next step is creating a budget.
But first, what is a budget anyway?
Well, we have seen and heard enough about the government budget and you may be familiar with company budgets as well.
A budget is an estimation of expenses you are planning for a future time period. This doesn’t mean we will stick (or have to stick) to the exact numbers. But having a budget defines what you will do in a given time period. For me it’s a reminder; how I promised myself I would spend my money.
After tracking your expenses for about 3 months, you have a pretty good idea of your monthly expenses. Now it’s time to create a budget. You can start with a single budget for the month. As an example, you can say, my monthly budget is Rs. 60,000. At the end of the month, you can see if you have managed within the budget or you have exceeded. If you have exceeded, you need to see why. It’s easy because you have tracked all the expenses. This is a discipline you need to gain by practice.
The next step is to have budgets for major expense categories. Find out 3 or 4 large categories and decide on a budget. This will help to take control of your money.
There are a few expense categories I watch carefully. I am not here to say I always stick to my budget. There are numerous times I have exceeded my budget and it’s ok. But you always need to try to adjust your expenses to meet your budget. Don’t let the world around you decide on your money. It’s your money, so own it!
Planning for big expenses
One of the main reasons to have a large credit card bill is that we don’t plan ahead. Most of your annual expenses are predictable. The car/bike insurance, key money, kids’ school fees, educational expenses, etc. These are predictable expenses.
On the other hand, there are unexpected expenses like buying a new phone if you lose your phone or maybe a sudden hospital bill.
How to deal with predictable expense
The truth is, some of our big expenses do not occur monthly (like car insurance) but our income does.
Think about it. You pay your vehicle insurance once a year, but we have not taken that into consideration as a monthly expense. The best way to deal with it is to allocate an amount from each salary.
As an example, if you can find out how much you spend on your vehicle (car/bike) per annum, you can divide that amount by 12 to get the amount you need to allocate per month. Check the example I have given below.
Monthly allocation per month = Annual Repairs + Annual insurance
5166 = 22,000 +40,000
As you can see, I have not added fuel cost in the equation. Because that happens monthly. You need to add only large annual expenses.
How to deal with unpredictable expenses
For unpredictable expenses, the best thing you can do is have an emergency fund. Trust me. This will save a lot of unwanted expenses and more importantly your peace of mind. Click here to learn how you can start an emergency fund in Sri Lanka.
Patience is your friend!
I know it’s a lot to take in. Especially if you have never thought about financial planning. Don’t get overwhelmed with all the steps you need to follow. It’s all about taking baby steps in the right direction. Start today and practice tracking expenses.
Just because you read this post, it doesn’t mean that you have to take control of your money right now! It’s a long-term thing so start small but do it as a habit. Eventually, you’ll get everything right.
What’s the best lesson you learned from this post? Add a comment below and let me know. Also don’t forget to share this post with “that” friend who is always careless with their money.
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- How to plan for your retirement – Why and how you should plan for retirement
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