Is one of your goals for this year to curb your excessive spending? Maybe you have an ultimate goal of saving up for a major purchase like a vacation or buying a house, or maybe you just want to be better in control of your finances and get a handle on your spending habits before it’s too late.
Regardless of the reason behind it, regularly analysing your finances is always a good practice because it will help you determine what spending you want to cut back on. You can read about how to stick to your financial goals for the new year as well as look through our tips for a healthy wealth diet below.
If you don’t already, make sure to start off by organising all of your regular expenses into spending categories. Start with general categories like home expenses (i.e. rent/mortgage payments and maintenance), bills, groceries, and entertainment, and then you can break them down further. Some other helpful categories you could use are fixed expenses and variable expenses. For example, your rent is a fixed expense because it’s the same every month, and the money you spend on restaurants is variable because it can differ from week to week.
You can even go further and break them down into sub-categories: needs and wants. Needs are obviously the things you can’t go without like groceries, rent, car payments, heat and hydro bills. Wants are the things you can do without but would be nice to have like holidays, going out to eat, and other entertainment.
Once you’ve organised everything, it gives you a better look at how you can control your budget and where you can afford to cut back. Necessary expenses like food and rent can sometimes be scaled down in some way, and unnecessary expenses can be better scrutinised to find ways to save, while still giving yourself a budget to have fun with once in a while.
It’s definitely easier to cut back on the expenses that you’ve classified as “wants”, but it is possible to better control your spending on “needs”. If you have a mortgage rate, you can refinance it for a lower interest rate, or if you’re spending too much on rent, you can downsize or move into a cheaper place. You could downgrade your cell phone plan, switch to a cheaper gym, or come up with a weekly grocery budget and stick to it. Cutting back on expenses doesn’t always necessarily mean making huge sacrifices as long as you know where to look to save.
If you need help figuring out where to cut expenses, spending ratios are helpful tools. Spending ratios are the percentage of money based on your gross income that you would spend on a specific area, like housing or food. If you notice one area of your overall expense gets too high, you’ll notice the ratio spiking and you can then cut back.
To figure out your spending ratio, add up all the relevant costs and compare that to your total income. Housing costs, for example, should not make up more than 30 per cent of your gross income in order to have a healthy wealth diet. Once you’ve crunched all those numbers, you will have a better handle on all of your spending and will be able to better control your finances. Contact Jacques for your coaching and motivational needs today.