Since I’ve started this blog and working in general one of the things that I really noticed as an important part of decision making is having all of the necessary information. Without any information you can’t make a good decision and if you’re forced to making a decision you’re guessing more than deciding. With limited information you can at least make a logical guess at the best course of action. This is why I prefer to have as much information as possible before making a decision, especially one with potential financial repercussions.
One of the exercises that I decided to do when I was looking at my cash flow last month was to track each and every expense. This way I can see where my money is going and for what. This experiment was designed to get me as much information about my spending as possible. I knew before I started that I was spending more than I was making and I was living beyond my means. Writing down my expenses in a high level sense confirmed this and could have been used as a starting point to making decisions. Instead of jumping right in, I just tracked my spending for the month. Needless to say I was a little surprised by how far off some of my numbers were.
Now that I have more accurate numbers I can make corrections in my spending that are more likely to take hold than if I were to just guess. Guessing would be a good place to start if you were planning on collecting the expense information and needed to make some cuts right away. Unfortunately this is only part of the story. For example if you think you only spend $500 a month on eating out and you cut back a but hoping to get down to $400 this is a valiant effort, but this effort can be very misleading if in reality you’re spending $800 on eating out. Without a solid informational basis for your starting point you can end up discouraged by the results, I know I have been in the past.
For most people they are either over estimating or underestimating their spending, in both cases the spending picture is inaccurate and can lead to poor budgeting. The good thing is that if you’re at the point where you are trying to accurately tabulate your spending and cash flow you can probably float along for a month doing things the way you were doing before. Use this month to discover exactly where your money is going. Most of the people I know at least pay some attention to their spending, but not very many of them are extremely detailed in where every penny goes. The small expenses for things like soft drinks, bank fees, and things like newspapers really add up quickly. If you were to buy a coffee for $1.50 every day of the month (notice I stayed away from the tastier and more expensive versions of the beverage) you’ll end up spending $45 which is all of a sudden nothing to scoff at. Add a few things like this daily coffee and your budget can very quickly get thrown off its tracks.
With a month of collecting information you might learn that you have a predisposition for that morning coffee or like in my case for eating out for lunch. When I was in school I never really had a love of statistics but I’ve learnt in the working and personal finance world that this data paints a picture of what’s really happening rather than what you think is happening. Rather unfortunately reality and your perception of reality can differ very greatly as I found out last month. Armed with more accurate information you can make adjustments to your spending to bring your back to living within your means or trim your spending to increase your savings.