The easiest answer to our debt problem is ‘oh simple, just make yourself a budget.”
Budgets are Awful
The issue with that solution is I don’t like budgets. I believe they are inherently negative. You have $50 to spend on Entertainment this month….you spent $51? Fail! They’re also overly constricting. Maybe I knew I was going over my Entertainment budget, so I spent $1 less somewhere else. Sure, I’m still on track for the month and I know that in my head. But if I’m using popular budgeting software, that Entertainment category is flaming red and that can be depressing.
I have yet to discuss my desire to become financially independent, I presume that’s just assumed. For me (and many other personal finance bloggers I’ve read) the biggest draw of FI is the freedom to do what you want. It seems that people who follow this path place an extremely high value on autonomy and I’m no different. Unfortunately, this is something budgeting just doesn’t offer.
Don’t get me wrong, budgets can be great to help enforce discipline for those who truly cannot control their spending. In my experience a lack of discipline isn’t what gets a lot of people into situations like mine, however, a complete lack of awareness is.
My recommended approach is take the time and effort to completely understand where your money is going. And I mean every penny.
A Better Approach
When my wife and I started down our path to become debt free, I printed out bank and credit card statements for the last two years and combed over them meticulously. I won’t sugar coat it, it took absolutely forever and was exhausting. But provided a tremendous amount of insight.
Until this point, my wife and I usually wouldn’t even balance our checkbook. We always just trusted the bank’s computers to get it right, we were way behind the eight ball. If you’re in a similar situation, don’t fret. With a bit of effort it’s possible to get on the right track.
I sat down with different colored highlighters and pens, then, starting with my bank statements began to categorize exactly where our money was coming from and where it was going to. Depending on how far back you go, there are some items you just need to accept. There is no sense wasting time trying to figure out where that $150 ATM withdrawal in February of 2016 went. I threw these types of transactions into an “Other” category and moved on with life.
After I finished with the bank statements I moved on to my credit card statements. Thankfully we only use 1 card for most of our spending, so it could have been worse.
Once everything was marked up and color coded, I transferred it all into Microsoft Excel and created personal Income Statements for our family.
Six out of twelve months in 2016 we spent more money than we brought home. $200+ for our electric bill in September in October? OK, maybe we need to turn off some lights every once and a while. And my god, does my family love Amazon.
Like I said, insightful.
Knowing is Half the Battle
I recommend taking a few days to complete this exercise and let it sink in, but only a few. If you’re like me, this is can be a bit emotional. What I learned was upsetting, but made me even more determined to rectify our direction. However angry with yourself you may be, do not give up here, you’re only halfway there.
After taking a day or two to accept your past mistakes, move on. Use what you’ve learned to improve. It’s time to really evaluate where your money is going and determine what’s important to you. I didn’t use this information to create a family budget, as I’ve stated our problem was a lack of awareness. However, if you feel a budget would be beneficial create one for yourself.
I’ve already mentioned my wife and I realized we could be more cognizant about turning lights off and needed to reevaluate our Amazon purchases. We also looked to reduce our cell phone bill, our cable bill and the amount we spent on groceries and alcohol.
Measuring is the Other Half
I am a firm believer in Pearson’s Law which states
“That which is measured, improves. That which is measured and reported, improves exponentially.”
The etymology and attribution of this quote is debatable, but that doesn’t make it any less accurate.
Today I keep a running total of all of our family’s expenses and our variable spending has come down simply because we are more aware.
For us, the intended consequence is we now have more cash free each month to use to pay down debt principle. The unintended consequence we weren’t expecting, has been the confidence gained by knowing exactly where our money is going each month.
I will continue to track our expenses moving forward because the value it provides is immeasurable. If you aren’t already, I would strongly suggest you do the same.
For more information on our story follow the links to: