If I ask you how much of your last paycheck you spent on car repairs, clothes or home maintenance, there is a high probability that you will be able to give me an accurate figure or a close estimate within an hour. But you will probably not be able to give me an answer within 24 hours if I asked you for the total amount you have spent on these same categories year to date (so far in 2011). The truth is that many of us are able to manage our current check, profit or windfall effectively, doing what I like to call “pay as you go” financial management, but we often deprive ourselves of the benefit of seeing the bigger picture.
You may be wondering what is wrong with managing your money (and really well too) as it lands on your laps, the problem with that approach is that it limits your view, and the view you have when you document what you spend is unbeatable. Let me try to explain this using something a bit more fun than accounting for money. If you could afford it, would you rather get the best front row seat at the stadium/arena to watch your favorite team/musician or would you rather sit at the back in the upper level section where all the players and artistes look like small flies and its all a blur? I am sure you’d prefer the front row seats, so why not do same when it comes to your own life?
Managing your earnings as you get it is good, at least you are doing something! But you are better off if you are able to review what has happened over a period of time because this can help you make necessary cuts and changes, negotiate better discounts and deals, and plan ahead. Your life is your business, and you, the CFO must be able to grow this business through proper planning and accountability. Let us take a look at the example in the table below. This is from Sola’s cash book or Microsoft Excel sheet on her computer as at the end of March 2011.
|Clothes, shoes etc||(300)||(500)||
By documenting how much she is spending and what she is spending it on, Sola can make crucial financial decisions that will leave more change in her purse. She will look at this sheet and realize that she probably made some poor choices in February, which led her to borrow money from her boss to supplement her salary. She may also decide to shop around for a better cable television deal because she is spending 15% of her monthly income on cable television and there may be better and cheaper providers in her area. And she may review her car repair costs and decide to sell off her car and save up to buy a new one in the near future because she is currently spending too much money repairing her ‘run down’ car.
You don’t really have to draw up something fancy or elaborate like a real company, you should just maintain something simple that works for you and empowers you to take stock and plan ahead. Research has shown that people who document what they eat tend to eat less and also eat healthier. That is the same thing that will happen to you if you learn to document how you spend your money. The ‘can i afford this now?’ question will be answered easily when you look at how much you have spent on various categories year to date.
So why not give this a shot in 2012? Don’t be surprised when you finish the year with more money in the bank!
Do you need help getting front row seats in 2012? Please contact me here: https://ourfinancialcoach.com/contact/