In my last post, I talked about the importance of building up a reserve to handle emergencies, as well as excess money which we should consistently park in our "Goose" Account for investment purpose.
But you may ask: Pressure to spend exists everyday. How do we manage it?
I recalled in my "financial" lessons to my sons, one of the first concepts I taught were "variable" and "fixed" expenses. I gave them examples of what constituted "variable" expenses e.g. MacDonalds' meals, spending on toys as well as "fixed" expenses e.g. school fees, home loan payment etc.
I pointed out to them that even the simple act of switching on a light involved a "fixed" expense (fixing of the lamp as a one-off expense) and "variable" expense (electricity costs, which vary according to our usage).
Frankly, their young minds were a little overwhelmed at first, and gave me a look that said, "Everything has a cost? Are you sure we can afford it?" After I assured them that I was tracking our expenses and yes, we use our money prudently, they felt a little more assured.
I then taught them to track their variable expenses and gave them a little reward in the form of "interest" whenever they decided to save up their pocket money. I also asked if there were ways to cut down on expenses. They suggested being more careful with switching lights off, not letting tap water run or simply, eating more at home. I asked if they felt these were hard to do. They shook their heads.
It amazes me though that adults never quite grasp this concept. Small actions to manage your expenses, performed consistently over a long period of time, are extremely powerful. So, here, I will be giving my five-step process to manage spending. Some steps though may seem rather unorthodox:
1) Place little cash in your wallet and just one credit card and one Nets card. Make sure your cards are well hidden from view when you open your wallet. This is what I call "Out of sight, out of mind". Placing little cash means that you will need to refill your wallet often. Each time you do so, you may then begin to ask "Hey, where did my money go?" and hopefully, you begin to be more careful.
2) From today onwards, keep every single receipt you receive. Track your non-receipted expenses using a simple mobile app e.g. Monefy. When the receipts get too bulky in your wallet, it's time to start recording your expenses using a simple Excel spreadsheet or if you are more tech-savvy, track everything on an app. Do this for at least 3 months.
If you're a parent, do this in front of your kids. Grab every learning opportunity to show them the expense sheet you have tallied. Refrain from saying things which imply you're not in control of your expenses, e.g. "How did I spend so much?" Instead, tell them the results of your expense tracking. Discard receipts which are more than 3 months old.
3) With three months of expense data in hand, categorise them into "fixed" and "variable" expenses. Fixed expenses are those that you have to pay on a regular basis and are less dependent on usage, e.g. cable TV, car loan, insurance etc. Variable expense are those which vary from month to month according to usage, e.g. eating out, self-care etc.
For fixed expenses, look for cheaper substitutes or simply do away with it especially things like cable TV, newspaper subscriptions and maybe even kids' tuition. Fixed expenses, usually paid through some automatic system e.g GIRO, are the easiest to lose track of. You'd be surprised how often we pay for something every month without realizing we don't really need it. For variable expenses, you may need to sub-categorise into finer categories. Most families find that "eating out" is one of the biggest drainers on money, along with "entertainment". Ask yourself if it's possible to have the same level of satisfaction by eating at home or simply spending time on cheaper or even free activities.
4) Now that you have an idea how much you have been spending on each category, draw up an annual budget based on these. Aim however to reduce expenses by at least 10% beginning the following month. Identify areas which are easiest for you to reduce. Then re-budget accordingly. If you foresee an inevitable big expense in the coming expenses, e.g. travel expense, keep your eyes out for cheaper deals or credit card promotions.
5) This 10% you have saved is to be placed in an account which you will not touch except for the sole purpose of investment. This is how you build up your "Goose" account. Repeat the process every month and continue to track expenses even when incomes go up.
Do remember: a good habit takes at least 30 days to build up. If along the way, you missed a receipt or two, it's ok. But keep at it, and you'd feel a sense of control that you never had before. Most importantly, tell yourself you are not "cheapo", you have a bigger goal – the bigger goal of being financial free one day.
Lastly, I leave you with this little quote on renowned investor Warren Buffett on how he handled his money:
"Warren Buffett started as a newspaper boy - and saved. He held on to every dollar he could hold on to. He bought practically nothing, because he hardly ever saw the money that he should spend. He always saw the balance that he would be worth in the future."