No matter what your savings goal is – whether it’s short-term, medium-term, or long-term – you need data. You need to know how much income you have and how much you spend.
You also need to know where all this money is going.
If you receive a fixed salary, tracking your income should be straightforward. Your paycheck will tell you how much your pre-tax income is, and how much you actually take home after deductions. You can also see if there are any automatic transfers to retirement savings accounts.
You may already be saving for the long term without even knowing it!
However, not everyone earns the same amount of money every month. Restaurant workers rely on tips. Salespeople earn bonuses. For freelancers, no two months are the same. If your income is irregular, look back over the past twelve months and calculate your average monthly income.
This is the money you can expect to earn each month in the next year. You must allocate this money to various expenses while also setting aside some for short-term, medium-term, and long-term planning.
Once you have calculated your average monthly income, you can start calculating your expenses. These expenses mainly leave your account in two ways.
Fixed expenses are those that are the same – or nearly the same – every month. They include your rent, car loan, Netflix subscription, and so on.
List these expenses item by item.
You might be surprised to find that you have so many fixed expenses. Some of them are necessary. You always need to pay your mortgage or rent. You need to pay for car and health insurance. If you have student loans, you have little say in whether you can cut this expense.
However, some fixed expenses are more flexible. You may even find that you are still paying for some subscriptions that you no longer use or rarely use. For example, gyms often assume that people sign up at the beginning of the year and stop going around March but continue to pay the membership fees. According to a study, over two-thirds of gym memberships go unused. This means wasting nearly $60 each month.
And since gym membership fees are automatically deducted from your bank account, you may not even notice.
Subscriptions are a very convenient way to pay for services you use frequently. But they can also become a very expensive way to repeatedly pay for something you don’t use at all.
When listing fixed expenses, categorize them into “necessary expenses” and “discretionary expenses.” The second category includes fixed expenses that, even if canceled, will not severely impact your life.
So, your list of fixed expenses might look like this:
Necessary Fixed Expenses
– Rent
– Health insurance
– Home insurance
– Car insurance
– Car loan
– Student loan
Discretionary Fixed Expenses
– Gym membership
– Netflix subscription
– Audible subscription
– Xbox Game Pass fee
If you want to reduce expenses, you may find that some expenses are easier to change than others. Canceling an Audible subscription or lowering your Netflix subscription level can save you tens of dollars each month, compared to moving to a smaller apartment or giving up your car, which is much more challenging.
However, discretionary fixed expenses are often not large amounts. The expenses that have the biggest impact on your spending and, simultaneously, the greatest disruption to your life are often those necessary fixed expenses.
But you cannot begin to plan where to cut expenses until you clearly see how your money is being spent and leaving your account.
In addition to fixed expenses, you will also have variable expenses – and these expenses are more challenging to calculate.
Your spending on food, clothing, and entertainment varies each month. Some months are just more enjoyable than others.
However, some months are more expensive than others. For example, vacations are costly but usually happen only once or twice a year. A friend’s wedding might mean pricey gifts. Every few years, your computer may completely break down, and that winter coat you thought would last ten years might be outdated much sooner than you imagined.
For calculating variable expenses, review the past twelve months and calculate an average for each category of spending. This may take some time.
First, list out your largest categories of variable expenses, which may include:
– Grocery
– Dining out
– Clothing
– Gifts
– Entertainment
– Travel
– Household items
This list may not cover all situations. You inevitably spend money on some items that are hard to categorize. You can add a “Miscellaneous” category.
Next, pull up your credit card statements and print out each month’s statement.
Use different colored highlighters for each category of variable expenses and mark your spending. By the time you’re finished, each line of every credit card statement from the past twelve months should be highlighted.
Calculate the total amount you spent on each category of goods over the past twelve months, then divide by twelve to determine your average monthly spending.
Of course, you can simply add up the total on each month’s credit card statement and then calculate your average total spending. This is also worth doing. However, you need more than just an overview of your overall spending. You want to know where the money is primarily going so you can see where it’s easiest to save.
For example, if you find that you’re spending a lot on dining out, tally up how many times you eat out each month and calculate the average cost of each meal. This way, you can see how much money you could save each month by eating at home one more meal a week.
Or, if you realize you’re spending over $100 a month on clothes because you need to dress well for work, you might consider a subscription service like Rent the Runway – a “Netflix for clothes.”
It’s easy for people to forget about infrequent but large expenses that can take a large chunk out of your bank account all at once, like traveling abroad. These are significant pleasures, but because they don’t appear on your credit card statement every month, they are easily overlooked. You might also think that these expenses are infrequent and not worth considering. But if you travel abroad once a year, then it’s a regular expense to remember.
You can’t decide where to cut back until you see where your money is going.
Now that you know your average income and have listed both fixed and variable expenses, if your income is higher than your total expenses, then you are already saving money – your life is in balance.
But this doesn’t mean you can’t save more. Making small cuts here and there can have a huge impact on your savings rate. This could allow you to enjoy better vacations or retire earlier. Trimming some discretionary expenses might be just what you need to buy a house sooner than expected.
If your income is lower than your expenses, then you have no choice but to cut back on spending. It’s impossible to save money if you spend more than you earn.
Start with variable expenses and prioritize cuts that you can make without significantly changing your current lifestyle.
A simple way is to use coupons. In the past, this meant actually cutting out coupons from magazines. Nowadays, it’s much easier. There are plenty of websites that offer simple discounts on various products. Even Amazon has a dedicated page offering discounts on items available on their site.
Before making a purchase, get into the habit of searching online to see if there are any coupons available. This way, you might save a few dollars.
The search may take just a few minutes but can be fun. By actively seeking discounts, you’ll end up spending less than other consumers, which in itself can be satisfying.
But be cautious. While looking for coupons, it’s also easy to buy items you don’t need just because they are cheap. The purpose of using coupons is to lower the cost of items you intended to buy, not to increase your spending on items you don’t really need.
One way to make sure you don’t buy unnecessary items is always to shop with a list. Before going online or to the store, spend some time writing down everything you need. There are many apps you can download to your phone to help you organize your shopping list. They also ensure that you don’t have to write down the same items every week and can even categorize them to help you find needed items by sections.
This way, you won’t just grab things from the shelves into your cart but will only select the items you know you need. You’ll be less influenced by marketing for frozen pizzas and chocolate bars and will find it easier to stick to your budget.
It’s also a good idea to shop for groceries after you’ve eaten – not only because you might end up buying more food. You might end up buying more of anything.
It is not entirely clear whether shopping while hungry actually leads people to buy more food. Research finding that hungry shoppers purchase high-calorie foods has been retracted. However, the assumption seems reasonable. If your stomach is growling, resisting the urge for chocolate at the checkout line is undoubtedly more challenging.
Other research has found that hungry shoppers do indeed buy more non-food items. In one study, researchers had 81 shoppers who had just left a large department store fill out a survey. The questionnaire included a question asking them how hungry they were. The researchers also scanned their shopping receipts.
The study found that hungry shoppers spent 64% more than not very hungry shoppers. And they bought more non-food items.
Shopping when hungry will make you crave a variety of things. So, before heading to the mall, be clear about what you need to buy and ensure your stomach is full.
You may set this up without even realizing it at times. You visit a website, a pop-up blocks the page, asking for your email address. It might even offer you some rewards – like a free e-book or a discount on your next purchase.
All you have to do is agree to occasionally receive newsletters from the company in your inbox.
You like the company and want to hear from them, so you sign up. You figure if their emails become too annoying, you can always unsubscribe.
But what you’ve actually done is exposed yourself to a stream of marketing messages. These messages are indeed effective. According to a reported study, email marketing is up to 40 times more effective than social media marketing and operates three times faster. You are receiving targeted ads delivered straight to your inbox.
Smart email marketers will also track your response to these emails. If you open the email or click a link, even if you don’t purchase, they’ll send you more content you like. Eventually, you are likely to buy things you don’t really need.
The more email subscriptions you have, the greater the likelihood of overspending.
Take some time to review all your email newsletter subscriptions. Understand that these emails aren’t just about providing you with information. They are designed to sell you products, they are advertising tools tailored to your preferences to persuade you to make a purchase. Unsubscribe from all email lists you’re not genuinely interested in reading.
Retailers have various tactics to make it easier for people to buy products. Many of these tactics involve obscuring the true price of items.
This doesn’t mean they don’t price them, but rather make the prices look deceptively low and easy to pay. For example, an Apple iPhone 12 Pro starts at $999 in the Apple Store. That’s a hefty amount for a phone. That level of spending digs a big hole in your savings and definitely hurts when you pay.
But if you buy the same phone from AT&T, you only need to pay $30.56 per month. That seems much more manageable. It’s less than what you would spend on a night out with friends and feels like a great deal for a top-of-the-line smartphone. However, over 36 months, you end up actually paying $1,100 – $100 more than a one-time payment. And you’ll have to add taxes onto those installment payments.
Sometimes, prices can also be lower than they appear. For instance, the 2021 Ford Explorer is priced starting at $32,925. This is an exorbitant amount, hardly anyone can outright pay in cash. But car dealers understand that they won’t sell many cars if they demand buyers to issue full payment before handing over the keys. Therefore, they offer various financing options.
Pricing allows buyers to compare the final prices of different brands and models but doesn’t clarify the real cost of owning or using that item.
To calculate this cost, you need to know the down payment amount, the amount to be paid monthly (including interest), and the term of the loan.
Say you buy a new car with a price of $35,000. You make a $5,000 down payment and pay $350 per month for 36 months.
This kind of deal makes you feel like you’re only spending $350 per month to use the car. But this doesn’t include the down payment. In reality, by the end of three years, you have paid $12,600 in total, though the initial $5,000 adds up to $17,600. Including the down payment, your monthly actual expense is $489.
However, when you decide whether to buy out the remaining car or trade it in, remember that the actual cost you’re paying each month is less than $489. You’ve paid about half the car’s price, and it’s likely retained about 80% of its value. Selling the car will get you 80% of $35,000, which is $28,000. You’d need to pay the remaining half the car price you owe the seller, which is $17,400. This way, you’d still get $10,600 back.
Besides paying for using the vehicle, you’ve also invested a portion of funds that you may get back in the future. Using this car for three years would actually cost you $7,600, or only $211 per month.
The purpose of leasing is to ensure that the amount buyers pay doesn’t exceed the cost of the vehicle’s depreciation.
Whenever you acquire something through long-term loans or leasing, it’s worth precisely calculating how much you’ve paid each month to use the item. You might find that your actual expense is higher than you imagined and might discover a more affordable way to obtain the same service.
Of course, sometimes you may realize that the service is more affordable than you initially thought.
Most of the money you spend each month is clear and easy to calculate. Gym membership fees and cable TV costs rarely change. Your rent is typically the same every month.
Other expenses fluctuate more. Energy costs vary with the seasons: you might heavily use the air conditioning in summer, reduce it in autumn, and switch to heating in winter.
There are also costs that change weekly. Some periods are more eventful – but also more expensive – than others.
Which expenses to cut back on depends on you and your priorities. You have to decide whether to reduce eating out, cancel a gym membership, or even move to a smaller apartment to save on rent.
But as we’ve seen, you can’t decide what to cut until you know for sure how much money you’re spending.
In the process of calculating costs, you may be surprised at how much you’re spending. Small but frequent expenses add up quickly.
But there’s one expense that is hard to notice yet likely your biggest financial burden: credit card debt.
Credit cards are incredibly useful. They’re almost a necessity for buying anything online. They let you not have to carry cash. They can earn you points for discounts, and even flight tickets and hotel stays. They also provide credit, allowing you to buy now and pay later.
But this credit comes at a cost. Annual interest rates typically start around 15%. If you charge $1,000 on your credit card and roll over that debt for a year, you’ll owe at least an additional $150.
And that $150 will accrue new interest, quickly sending your total amount owed out of control. The average American household carries $6,270 in credit card debt. This means that the average American household pays at least $940 to credit card companies each year.
When you want to save money, the first thing you should do is pay off your credit card debt. Eliminate these high-interest burdens. Stop paying substantial fees to use the credit card company’s money.
After clearing these debts, you should develop a habit of paying off your full balance each month. Borrowing from credit card companies is one of the most expensive ways to obtain credit.
This doesn’t mean you should never borrow money. Businesses borrow to invest; they use the bank’s money to earn more money in the future, covering debt and interest. Consumer installment credit can allow you to enjoy purchases now rather than waiting until you have the cash.
But always check the annual percentage rate (APR) so you know exactly how much interest you’re paying. Also, confirm that you can’t borrow the same amount elsewhere at a lower cost.
And ensure you can’t wait to save up cash to make the purchase instead of buying now.
In this series of articles, we also discussed why you should save money, how to save money, where to put your savings, and retirement funds.
The article originally appeared on the Due blog website, authorized for translation by the English edition of The Epoch Times: “The Ultimate Guide To Saving Money, Part 3: Track Your Spending”.
The content presented represents the author’s views and opinions, provided for general informational purposes only without any recommendation or solicitation intention. The Epoch Times does not provide advice on investment, tax, legal, financial planning, real estate planning, or other personal finance matters. The Epoch Times does not guarantee the accuracy or timeliness of the content.