Hey guys! So before I dive into how we actually go through our expenses, I just finished reading the book The Psychology of Money by Morgan Housel and had some thoughts on this topic that I wanted to share (I’m actually thinking of doing a full blog on this but wanted to go ahead and cover some highlights). Overall I highly recommend reading the book, and I wanted to first share one of the biggest takeaways I had from it. It’s something that has really opened my eyes regarding how I want to spend my money and manage it in the future, and I thought it would be helpful to share considering the topic of this blog.
One of the messages in the book is: wealth is not what you see, but rather what you don’t see; it’s what people choose to not spend their money on. When I first read this and read the explanation behind it, I was like, wow that is a really powerful statement. It’s true in a lot of ways and something we don’t think about (at least I didn’t). For example, if we see someone driving a luxury car, it is easy to make the assumption they are wealthy. But in reality, we don’t know whether they paid cash and have plenty of savings in the bank, or whether they over extended themselves and they are struggling to make payments. Point is, some people who own nice/luxury items are actually wealthy– they can maintain a certain lifestyle while also remaining wealthy based on what is in their bank accounts. But then there are also people who have much less in their accounts but on the outside have nice things.
Therefore, a lot of times wealth can be hidden because people who know how to acquire actual wealth may spend (or not spend) their money differently. I feel like my parents are a good example of this. They both drive nice cars– a 2019 Mazda and a 2020 Subaru but they aren’t driving luxury cars. At first glance you may think that they don’t drive luxury cars because they can’t afford it. While in reality, they could go out today and pay cash for any car they want and not have it impact them financially. They aren’t frugal by any means but because of what they have chosen not to buy, they have been able to acquire what most would consider “wealth”.
I never really thought of money in that way, and having it framed in those words was really powerful; it made me rethink of how I choose to manage and spend money and has really encouraged me to save. I don’t feel like I am financially irresponsible however I know there is room for improvement especially when it comes to building long term wealth. Patience > Greed (another principle in the book).
All that to say, if you want to get a better hold on your finances, you first have to know where your money is going. It can be scary to look if it’s been something that you’ve been neglecting, but knowledge is power and it’s never too late to start. Here’s what we do to go through our (yearly) expenses:
STEP 1: Print out all of your bank and credit card statements. We print out ours from the past year, but if this feels really overwhelming you can do the last 3 or 6 months. This will still give you a pretty good overall picture of where your money is going.
STEP 2: Get 3 different colored highlighters. One color for: bills/necessary expenses, business and leisure. For you, it may just be bills/necessary expenses and leisure which is fine. The point is, when you go through your statements you will highlight each individual expense based on what category it falls into. When you’re done, it starts to give you a clearer picture based on what color highlighter shows up where your money is going.
For us, we pretty much put all our expenses on a credit card and then pay it off so we can acquire points, and then we have a separate business credit card to keep track/separate business expenses. The benefit of this is that most credit card companies will automatically categorize your expenses when you print an “end of year summary.” So you don’t necessarily have to highlight/categorize each expense because it will outline categories like: groceries, professional services, travel, shopping, automotive, bills & utilities, etc. And will show you automatically the total that you spent in each category.
Step 3: See where you can cut back. For example, in 2019 we saw that we were spending way too much on daycare for the dogs. All of the sudden you’re like I spent how much on what?! Going out to eat was also another category that added up quickly. We decided to put in a monthly budget on how much we could spend going to restaurants (this ended up not really being an issue because of COVID but the point is to just be more aware). In general, something to also double check is your subscriptions. Those can add up quickly and something you may not even be aware of. You can double check what you’re currently subscribed to on your phone by going to your settings, clicking your name at the very top, and then click subscriptions.
I don’t want to give a lot of advice beyond this because everyone’s finances and financial goals are so different but one thing the book (The Psychology of Money) does talk about is that you don’t need a specific reason to save. Even if you aren’t saving for a house, car, etc. having money in the bank gives you freedom. If you decide to leave your job because you’re miserable, you can take more time getting another one vs. taking the first thing that comes along because you’re not worrying about how to pay your bills. If you have a health scare and your insurance doesn’t cover everything, you don’t have to stress over how you’re going to pay it. Your car needs a repair, you don’t have to wonder if you can afford to fix it and how you’re going to get to work the next day. Point being, having savings gives you a peace of mind which is worth so much!
I hope this blog was helpful and anything other finance topics can be found here!