When I start working with someone on their finances, step one for them is always tracking income and expenses. Not changing what they are doing, but just starting to take note of it. People come in and start talking about their priorities and goals such as get out of debt, save for college, save for retirement, buy a new house or car, etc. and about how they aren’t making the progress they want. We talk about their current situations (and I try not to scare them off with words like assets and liabilities) and I take some notes then I tell them to go home and track every penny they spend for the next month. It’s amazing how little most people know about their own spending, and if knowledge is power this is definitely how you get some power over your money.
Just the act of having to track their spending and report back does change most people’s spending – but not as much as you might think. 30 days is a long time, so even those who start out trying hard to keep it to what they think it should be usually fall into the regular habits somewhere during the month. The spreadsheet we have at the end of a month ends up close enough to the norm that it is a very valid conversation starter about being honest about priorities.
Here’s the one thing that next conversation has to cover: if your spending doesn’t match your priorities, those aren’t your actual priorities. It’s not an argument, or a critique, or a judgement – it just is. Priority means “first”. If your priority is saving for a house, and it really is your first goal, it always happens, you find a way to move closer one dollar at time. Your brain chimes in every time you open your wallet with a little thought – are you sure about this? What about saving for the house?
The hard part is accepting that your personal priorities probably don’t match your stated priorities. My experience is that most people have adopted mostly generic stated priorities but not really internalized them. It’s an answer to a grown up question, a script of things we know we should be doing and the answer everybody has ready. What are you financial goals? I want to pay off my student loans. I want to have an emergency fund. I want to save more for retirement.
But put those same people with those great priorities into tracking their finances for a month and what you get is a million reasons why all this other spending happened instead, and usually a story about how next month will be different. Mom’s birthday was last month and I really wanted to treat her. I went out for drinks when a coworker was leaving. Tickets for my favorite band went on sale. We ate out more than usual because of xyz. I needed a new outfit for this event. I had to pay deposits for summer camp. This is valid. The problem is that the list of valid expenses is never ending for all of us.
The reality is that each of those items was more of a priority than the stated goal. Let me put it like this… if the big goal was paying off student loans, then:
- A big gift for mom was more important than paying off my student loans.
- Going out for drinks with my coworker was more important than paying off my student loans.
- Tickets for my favorite band were more important than paying off my student loans.
- Eating out was more important more important than paying off my student loans.
- A new outfit for that event was more important than paying off my student loans.
- Deposits for summer camp were more important than paying off my student loans.
YOLO right?
And you only live once next month, and the month after that, and so nothing will change unless you spontaneously decide you only pay off your student loans once (YOPOYSLO just doesn’t have the same ring to it).
Now back to the tracking and it’s value. If you are 100% honest and every penny goes on your tracking sheet you can start to pick out little ways you could have tweaked your decisions. At first you see them in retrospect – by looking back at your month and realizing you could have made a few decisions a little differently. Eventually you see them in real time, and you do make decisions differently.
- You search around a little more for a better deal or a coupon code on that gift for mom.
- Have just one $12 drink at the bar instead of two.
- Skip the new shoes and just get the dress.
- Buy concert tickets in one price section lower.
- Pack some snacks and skip just one meal out.
Anyone of those things could leave $10 on the table towards the big goal. All of them easily add up to over $100 left towards a bigger goal while you still get to live your life.
I bet if someone challenged you before you checked out at the grocery store to spend just $10 less right then, you could do it without any drama (or coupons). You might just double back to see if there was a fruit you liked on sale instead of the one you picked up because it’s the one you always get. We just don’t think that way most of the time – we rely on habits and think in to-do list check boxes.
The point – the big idea even – is that financial success is (for most people) in the details. Tracking works if you are honest with yourself and can use it to find not just big changes, but small changes that will make a big difference. I hate the “skip your $5 coffee” advice. I’d rather you just got a $4 coffee instead of a $5 coffee. Those kinds of choices, those small wins, are super important. They can add up significantly over a month. They empower you to make more small changes because you get a ‘win’ without measurable sacrifice. And because of that, they have the benefit of being sustainable, long term changes.
Sustainable Changes. That is the glory of tracking. Once you reach this particular big goal, guess what? You’ll have another one. So changes that are so long term they can last your life are the ones you should search for.
BUDGET: Track your money. Review it at least monthly in a sit down meeting with yourself (or spouse, family, SO). Look for small adjustments in your choices, and move more and more to your current big goal.
P.S. Yes, I love, love, love budgets – but the budget is useless if you aren’t tracking so this is a great place to start. And this if the very word budget makes you feel queasy.
P.P.S. This is also super useful to help you figure out your goals and where you stand right now.