Do you know — I mean — really know how you spend your income from month to month?
How much you spend on gas, insurance, coffee, restaurants, groceries, clothes, tolls, taxis, movies, Netflix, booze, Spotify, golf, private tuition, and yoga?
I’ll bet you don’t.
You may think you do, but you really don’t know.
I didn’t either, not until I started using the online financial website Mint.com.
In my last post I explained how you can achieve more control over your finances by utilizing the many benefits of credit cards.
The next step in optimizing your cashflow is about understanding and then eliminating unnecessary overhead and expense, and this can’t be done until you have accurate data on how you spend your money.
Business owners employ bookkeepers and accountants to help analyze their expenditures. And a business — for example — may realize they are spending too much on paper and office supplies. Which may lead to finding a new vendor or creating incentives to reduce paper use.
Or, they discover outsourcing janitorial services would be more efficient and less expensive than having a full-time janitor on their payroll.
Without the data there is no ability to spot trends, and therefore nothing would have changed.
Most of us are on our own, and without knowing the reality of our spending, we can’t build a workable plan to maximize our savings.
When I was deeply in debt, not only did I lack control over my personal finances, I lacked vision into how I spent my money.
For example, each month I’d guess $500 as my monthly spend for automotive expenses, but I didn’t really know.
Nor did I have the time (and desire) to analyze my receipts and credit card statements.
I wasn’t able to fully understand the scope of my spending habits until I started using the online personal finance platform, Mint.com.
For those of you who don’t know, Mint has over 20 million users and is operated by INTUIT, a finance focused software company who also owns Turbo Tax and QuickBooks.
For me, using Mint was a game changer.
In a nutshell, it does all the work of collecting and analyzing data from all my accounts: Credit Cards, banks, utilities, insurance, loans, investments, etc.
All I had to do was provide login information and passwords and they securely did the rest, for free.
After just a few months on Mint I quickly noticed a difference in what I thought I spent — and what I actually spent.
For example, I always assumed my monthly auto-related expenses were around $500 per month. But in reality, they were more like $800 a month. How could this be? I didn’t even have a car payment!
Well, my “paid-off” car is older — meaning it requires more maintenance, and I was forgetting car insurance because I paid it in a lump some instead of monthly. So without insurance or maintenance my spending was around $500.
The advantage of knowing my actual spending helped me plan better. There was nothing glaringly wrong with $800 a month — it’s high — but then again, I drive a lot of miles, and pay higher insurance rates because I’ve had a few accidents — and I live in a big city. So, I’m ok with it for now.
Greater visibility into my spending habits shed light on other areas where I could improve. Like dry-cleaning.
I was spending over $300 a month keeping my work clothes cleaned and pressed. I decided it was too much, so I invested in a different wardrobe — non-iron clothes that can easily be laundered at home, and this dramatically reduced my monthly dry-cleaning bill. Check out Bluffworks for great business attire that is completely wrinkle free.
My motivation for reducing my dry-cleaning bill was brought on (in part) by the realization my auto expenses were $300 higher than I thought.
Once you know what you actually spend you can begin budgeting for greater optimization, reducing unnecessary overhead, and saving more money.
Variable vs. Fixed Expenses
What’s important to consider about our expenses is that most of them are variable —meaning they can fluctuate from month to month.
I spend way too much on wine each month … but … if and when I need to cut back — I can.
But at least I didn’t sign a loan document requiring I buy wine each month.
I spend about $100 a month at Starbucks — because I am addicted to their green iced tea. I’ve come to peace with my addiction, but if I have to, I can stop.
The opposite of variable expenses are fixed expenses, and these are the ones that can lead you into financial slavery.
In the business world the biggest fixed expense is often payroll, and when companies are forced to reduce overhead they usually start by laying people off.
For us — fixed expenses are usually the stuff we can’t afford now — so we borrow money from a bank to buy it, like a mortgage, furniture, cars, credit card debt, and student loans.
What dug me into $250,000 of debt was a combination of poor cashflow management aided by too much fixed overhead.
I got out of debt quickly once I reduced my fixed expenses to about 1/2 of my take home pay. For example, I paid off my car, I sold my house and moved into a more affordable one. And I got rid of all my revolving credit card debt.
Below is my Cashflow Budgeting Optimizer. I’ve reduced the number of categories for budgeting purposes to 11. There really is no need to have any additional categories, but do whatever works for you.
Please note where the savings category ranks on this list, very high. Without optimizing every other category I wasn’t able to optimize the most important category, which is my savings.
And I note which expenses are fixed, which are variable, and which expenses I have to pay for in cash vs. credit card. The more I can pay on credit cards (without incurring fees or debt) the more control I exert over how and when I pay these expenses.
No business thrives without simple data, and regardless of how much money you earn, you’ll never realize your true cashflow potential unless you have the same data about your spending habits.
In my next post, I’ll share with you how to maximize your paycheck from a tax and retirement planning standpoint. And how to easily identify if you’re over-spending in any particular major category.