|
A major step toward financial freedom is about getting back in touch with your money and understanding that you have the power to decide how to use it. And it's about being honest with yourself. Have you ever taken a big wad of bills from an ATM machine, then found yourself, a day or two later, nearly out of cash and unable to reconstruct exactly where you spent it? And even when you retrace all your steps, you still come up $20, $40 or $60 short? It's upsetting, but most of us feel that way most of the time: a little short, a little panicky, wondering exactly where our money is going.
Where Do You Think You Stand Today?
What does it cost you to live each month? If you are married or living with someone with whom you share expenses, please ask him or her to write down the answer to the same question. Most of us believe we need about $1,000 to $1,500 a month less than we actually do need to go on living the exact same way we live right now. Surprisingly, this figure seems to vary only a little bit regardless of income levels. Where does this month-to-month self-deception lead us? Into financial chaos. Often, our planned spending doesn't cover expenses that don't occur every month or expenses that just crop up.
For example:
- Do you consider the cost of your gym membership per month even if you pay to renew just once a year?
- Do you pay your insurance premiums twice or four times a year? Do you calculate the cost of insurance in your monthly bills?
- Where did you go on vacation last year? What did that one-time expense cost average over twelve months?
These big expenses hit once or twice a year, probably surprising you every time. And then there are seasonal expenses:
- Come summer, do you forget about how much higher the gas bills run in the fall?
- Do you have your windows washed once or twice a year?
- Did you send your children to summer camp last summer
- Do you get your hair cut and maybe colored every couple of months? How much, then, does it cost every single month?
Here's another surprise: If you make some sort of payment every week—child care, a cleaning woman, a mortgage payment withdrawn automatically every two weeks—the extra weekly payments will take place in four months of the year. Plus the smallest expenses add up fast—the ones too small, you might think, to be worth figuring into your budget at all. For instance, do you go to the movies once a week? When you do, do you buy the tickets for yourself and your partner, have popcorn and sodas, go for a simple dinner afterward, as simple as pizza or a burger and fries? That's not so much, is it? No, it isn't, not on any given Friday night. Maybe $16 for the tickets, $4 for the popcorn and sodas and $20 for a simple meal. But once a week over a year, that's $2,080. And too many of us forget to include expenses so "small."
Other "small" expenses add up just as much. Magazine subscriptions, cosmetics, supplies for the yard, oil changes for the car, batteries for the flashlight, charcoal for the grill: Do you know what it really costs you to keep your life running smoothly over a year's time? How about special occasions? How many birthday parties, house warmings and baby showers did you attend last year? Didn't you bring a present to each one? Might you have done that twenty times or more last year? Finally, you need to allocate $50 to $100 each month for miscellaneous unpredictable expenses: dental work that's not covered in your insurance, travel to your brother's wedding. Most of my clients are shocked to discover by how much they have underestimated—and that's when they've guessed as honestly as they can. It's a scary realization, but there's a wonderful flip side to that fear. Once you take this step, you will feel better for knowing the truth. And you will begin to gain power over the money that's controlled you for so long.
How Much Is Going Out?
Get out your canceled checks, ATM statements, credit card bills, whatever will tell you how you spent your money over the last two years. These papers are more revealing than a diary; they contain the key to how you live your life. Yes, it will take you some time to do this, but think how much time it will give back to you in the future. You work 40 hours a week or more to earn your money. Take a few hours to take your money out of the darkness, to see it in the light of reality, to see where you stand. Don't just read these pages—pick up a pen and take action.
- Go through your checkbook, canceled checks, computerized statements, all your records for the past two years. Not one year, but two years. Maybe this year was an extraordinary time - you remodeled the house, bought a new car—but looking at a two-year period, you'll get a good idea of what it costs you to live the way you are living. All your checks, cash withdrawals, money spent every month, money spent once a year, money spent once a season, holiday expenses, everything.
- Make categories for each month—such as telephone, gasoline, food, utilities, vet bills, golf fees, baby-sitting.
- After all the categories are complete, total each category. Divide each category by 24. This will give you how much you spend per month on average for each category.
- Now add together all the averages in each category. This will tell you what it costs you to live each month. Remember, these are averages. If your average is $3,000, most months you'll spend less—say, $1,800 or $2,000. But in some months you'll spend $5,000 or $6,000. To meet your expenses, you need to bring in that average number each month.
|
