How To Take Control Of Your Expenses

How to Take Control of Your Expenses

No matter if you just graduated college, or are nearing retirement, everyone has expenses.  Unfortunately, a lot of us have trouble controlling these expenses as we spend above our means, which reduces our excess funds.  If you have issues with spending too much, then you should read along to learn five strategies on how to take back control of your expenses/spending. 

Key Takeaways:

·       Track Your Expenses

·       Create a Budget

·       Remove the Unnecessary

·       Pay Off Debt

·       Follow a Savings Plan

Track Your Expenses

The first step for taking control of your expenses is to track them.  Our everyday lives are busy, we are constantly spending money which makes it difficult to gauge how much we are spending on certain items monthly.  For example, if I asked you how much you spend on take-out each month, could you give me an answer within a hundred dollars of the actual amount?  Odds are, most of us cannot, which is why it’s so important to start tracking your expenses.  You will likely be shocked when you see the results.

Therefore, being about to recognize your spending habits is really the first hurdle.  One method is to look at your past two months of credit card statements.  Categorize the expenses into different groups (food, clothes, etc.), and then calculate how much you spent on each group in each of the past two months.  From there you can average the two amounts to determine your current benchmark spending amount per group.  Once you understand how much you are spending, you can start to formulate a plan of how much you want to spend on each item which we will cover in the next section. 

Create a Budget

The next step is to create a reasonable budget that you can hold yourself to.  A budget is simply a plan for how much money you plan to spend over a certain period.  You can create a weekly, monthly, or annual budget.  However, the Expense Worksheet that I provide to my clients is an annual budget template in Microsoft Excel.  This budget categorizes the expenses into four different categories: liability expenses, fixed expenses, variable expenses, and discretionary expenses.

From there you can fill in each category with your expenses.  My budget template has prefilled expenses in each category, but you can adjust these as you see fit.  Whether that means you add additional rows for expenses it does not include or delete unneeded expenses.  You could also create your own budget worksheet if you prefer.  If you plan to create your own, then you should do that in Microsoft Excel, and you can download my template to use as an example.    

The budget worksheet should be used as your spending guide.  In addition to all the necessary items like food and rent, you need to add in the more discretionary expenses like eating out.  These are areas where you should focus on what you want to spend on these items rather than what you have been spending.  If you eat out too often, then you should determine an amount that you are willing to spend each month, and then hold yourself to it.  Doing so will improve your discipline, which is an important characteristic when taking control of your expenses.

Remove the Unnecessary

The next thing, that was slightly touched on above, is to cut out the unnecessary expenses.  Once you begin to track our expenses, it will be easier to determine where you are spending too much money.  For a lot of people, that could be eating out or buying coffee every day.  For example, preparing your own food could save you at least 20% per meal.  If you are using a delivery service, then the percentage saved would be even higher as Doordash/Uber Eats has a delivery fee, other fees, and a tip involved.  While brewing your own coffee every day, as opposed to purchasing it can save you hundreds of dollars per year and would save time.

Taking this action would result in your starting to save money immediately.  It can also be applied to shopping.  If you are the type to go to the grocery store and purchase items based on what sounds good, then you should adjust.  Instead, you should go to the grocery store with a list and stick to purchasing the items on the list. This rule applies even better to shopping at a mall or the outlets.  It’s easy to see another piece of clothing that you think would look great or complete an outfit that you have.  However, clothes are expensive, and this could lead to significantly more spending than needed.  Therefore, if you stick to only purchasing what you NEED then you can once again take a step towards controlling your expenses.

Pay Off Debt

There are people that pay cash for everything, but most people rely on financing for their large purchases.  Unfortunately, these debt payments stack up and could stand for a large portion of an individual’s monthly expenses.  If you have any high interest rate debt mixed in there, then you should consider paying it off early to reduce the amount of interest you must pay.  For example, the interest rate on a mortgage often falls between 3-5%, while the interest rate on a credit card typically stands above 20%. 

Let’s cover an example to understand the impact of paying high-interest debt off.  Let’s say you have $12,000 worth of credit card debt accruing at a 20% interest rate.  On top of that, you have another $20,500 of debt at 4.5% over a 10-year period for student loan debt.  The annual amount of interest you pay on the student loan debt is $485. Compared to $2,400 for the credit card debt, even though the principal amount is significantly lower.  Therefore, if you are able to pay off your bad debt, then you should consider it because it would substantially reduce your total interest payment.   

Follow a Savings Plan

If you do not have a savings plan, then please read this section carefully.  I will explain two different savings plans, the 50:30:20 Rule and the 28/36 Rule.  Either of these plans can be used to determine how much money you can spend and how much you need to save each paycheck.  These rules will ensure that you are saving enough for retirement and not spending excess amounts on unnecessary things.

The 50:30:20 rule segments your income into three categories.  Under this strategy, you would spend 50% of your salary on your needs and 30% on your wants.  Your needs would include your rent, mortgage, groceries, etc. while your needs would be things like eating-out and vacations.  The final 20% would then be invested in conservative investments such as index tracking mutual funds or ETF’s.  I would recommend using funds that track the performance of the S&P 500 for these investments because it best represents the overall market. 

The 28/36 rule is a little different but strives to achieve the same goal.  Under this rule, it states that your household expenses should not be more than 28% of your gross income, and less than 36% of all existing debt. This rule is primarily used for real estate management companies, if the housing loan falls below these measures, then it could make sense for the company to renew the loan.  However, it can also be used for personal finance like we have done here.  

If you would like help setting up your budget or determining which expense reductions methods are most suitable for you.  Then I would suggest you make an appointment with a financial planner.  If you are interested, I offer a free consultation where we can review your situation and the ways that I could help.