Look after the pennies

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Look after the pennies.

Seven or eight years into married life, my husband sat me down to discuss our spending. More than twenty years later I remember the conversation and the overnight change in my money attitude — although my actual spending took a little longer to change.

Over a wet weekend he entered all our year's expenditure into a spreadsheet, categorising it broadly — house, his, mine — and breaking it into subsets such as personal grooming, restaurants and travel.

I could not believe how big some of the categories were, and how disproportionate our spending was. Some discretionary "luxury" items enjoyed a much bigger allocation than essentials like our mortgage.

It was with some nostalgia that I read a financial column entitled Where does it all go? The author questioned how our money gets frittered away, from a society and a personal point of view.

Think about what society looked like in the 1950s. For the most part we had food, houses, jobs, children and friends. Fast forward to today and things look remarkably similar in many ways.

Except, incomes have increased four-fold since 1950 and spending has increased accordingly.

As our incomes have grown, we could have chosen to spend the extra money wisely. We could have put more of our money into savings and real assets not financed by borrowing.

To stop the spiral, the author suggested everyone would benefit from "the ridiculously simple technique of recording where all your money goes for a few months".

He explained how:

  1. Spend only from one bank account. If there are two of you, use a joint account where you both have debit cards.
  2. At the end of the month, download all of the transactions into a spreadsheet.
  3. Then rank the items by size (largest first, smallest last) and see where it all went. Group each item into categories that make sense for you (food, power, recreation as examples).
  4. Work down the list looking for the big wins and the quick wins. For example, if the largest item is your mortgage payment, ask yourself: how recently have I reviewed my mortgage? Am I on the best deal?
  5. Then move to the next item. If this is your power bill, when did you last switch to the lowest cost supplier?
  6. Then ask yourself (and your partner) for each significant item, did I (or we) get happiness, life energy, great memories or knowledge from that spending? In other words, did I get real value from it?
  7. Spend less than your income. Even if things are tight, pay yourself first and take say $2 at the start of the month and put it in a jar marked "Financial Freedom Fund" or something that captures your imagination. Next month double the amount — and double it again the month after that. Soon it will be real money.
  8. Next month tot up your spending again, congratulate yourself that total spending is slightly less and you are slightly happier. Then repeat this as many times as it takes for your new habits to sink in.

This process might seem a bit dull and penny-pinching; that's why my husband chose a wet weekend. But I can vouch for it. You can only become financially independent when you know what your required level of spending is.

Knowing how we spend our money allows us to change bad habits and develop better ones.


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