Carl Richards has a great analogy about tracking your spending – it is very similar to flossing. We understand how important it is to floss, but it’s not something we like to think about, let alone do. So, we lie about how often we floss to the dentist and then promise to be better.
This hit home for me. Honestly, I never tracked our spending until earlier this year when I knew we had a lot of transition coming up – we were getting married, moving and starting businesses. All of this hit our cash flow, so I felt like we really needed to become aware of what we were spending so we could properly plan.
I learned a valuable lesson from this – we should not have let the transition be the catalyst to start tracking spending. The financial planner in me took over because I needed to figure out the numbers – how long would our cash last? While this is important, I also found that is enabled us to better reflect upon how our spending aligned with our values. This raised our awareness and allowed us to have a better conversation about how we were spending our money.
I learned two valuable lessons from this experience.
Align your spending with your values
Rather than looking at budgeting as a punishment – something that makes us feel guilty, I think we can look at it as an opportunity. An opportunity to better align our spending with our values. If you are struggling to identify your values, first look at your calendar and your bank account. Time plus money spent typically equals what you truly value.
Ramit Sethi talks about identifying your money dials which is a concept I love. Ask yourself this question – what are some areas that you LOVE to spend money on? For us, we identified:
- Health and fitness
- Friends and family
These are areas we shouldn’t feel guilty spending money on because we love it. If possible, we want to spend MORE on these areas since they bring us so much happiness.
Now – what are some areas that you don’t really care about spending money on? For us, we identified:
These are the areas that we can reduce to free up money so we can spend more on the areas we love. This is why tracking your spending is so important – without the awareness, you aren’t able to identify the areas you can cut, so you can spend more on the areas you love.
When you are using your money in a way that is directly aligned with your values, you have a much healthier relationship with money. Money isn’t viewed negative, but rather, it is viewed as an opportunity to further live out your values.
The numbers do matter
Now, the less fun stuff. I talked about how you spend, but the amount you spend is obviously important as well. I’ve run thousands of financial planning projections and the two primary drivers that determine success are:
- Your spending (which you can control)
- Investment returns (which you can’t control, so we will ignore for now)
It is critical to understand what your typical spending is if you are trying to make any important financial decisions. I’ve talked about achieving financial freedom – where you have the ability to work when you want, how you want and where you want, and use investment income to fill any gap to support your spending. Well, the important assumption there is your spending.
You will never be able to perfectly predict your spending, but you can analyze past data to understand how you’ve been spending money. In order for you to make guesses for where you want to be, you need to know what the estimated cost of those guesses looks like.
The awareness here is about the amount you will need to spend in order to live the life that is directly aligned with your values.
Once you are aware of how you want to spend your money and how much it will cost, you can feel confident that you know what your ideal lifestyle will generally cost.
So where do you start?
There are plenty of free softwares like Mint.com where you can sync up your bank accounts and credit cards to start tracking your spending. The tools are there and it’s not difficult to do, but can you commit to it?
I recommend trying once a month to track and then reflect on your spending. Don’t try to shame yourself while going through this exercise, rather, reframe your thinking to try and find areas that you could reduce, so you can spend more on the areas you truly love.
After you do this for a few months, it won’t seem that bad. Set a time on your calendar each month, have a drink and spend 15 minutes classifying expenses. Most of the time, the system will automatically classify it correctly for you anyway.
Don’t you think a 15 minutes/month investment of time is worth it to possibly find ways to better align your spending and help you figure out what your ideal lifestyle would cost? I do.
- Reframe how you think about budgeting – you are simply raising awareness.
- Think about your money dials and reflect upon how your spending is aligned with those.
- Track your spending for 15 minutes every month. Once you have the data, you can start guessing at how much certain aspects of your ideal life would cost.
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