Shortly after deciding a number of goals for 2014, along with some life goals, I set some time aside to think through how I spend my income. You probably would be surprised to know that I didn't really know what it all gets spent on (or maybe you are in a similar position?). It just gets spent. Often I don't have enough left for some of the things that I wanted to do, like family days out or saving for a trip to Disney World. I do sporadically put something into a savings account for a rainy day; however, it only grows when I have a quiet month spending wise, or managed to remember to put some money in a savings account early in the month.
So, I started to pull together my regular outgoings on a spreadsheet from my current account and credit card to examine my spending (more help on this can be found here). This was a pretty straight forward task for the majority of items, but I found it extremely useful to see it simply documented where my income was going. A large chunk of it was going on items I am committed to paying i.e. mortgage, gas, electricity, etc. and have no wiggle room to lower the price (I regularly compare prices on the essentials and switch provider as necessary). I also have a one year old daughter, which brings with it endless bills for dipers, milk, clothes... I think all of this is essential spending, though we she is already in her second cot and we used a Moses basket when she was very small. In addition to this, I noticed another black hole ... the seemingly small, but frequent, ATM withdrawals which added up to a significant sum. Perhaps you have a similar gap in your spending? I really couldn't put my finger on where this had gone. Do I really drink that much coffee, eat that much cake and whatever else? Apparently so! My first takeaway from this exercise was that simply seeing the detail written on paper (so to speak) is the first step to dealing with it.
With all that laid bare in front of me, how do you know what is the 'right' way to be spending your income? Well, I looked around for advice on the internet and came across a budget that really worked for me. You may have heard of it already, the 50, 20, 30 rule. This budget suggests approximately 50% of your income being spent on essential spending such as housing, heating, transport and food; 20% for financial priorities like debt and savings; leaving 30% for lifestyle choices i.e. fun! You map your list of spending to these headings, and see if you have the right balance.
My first thought (despite the ATM withdrawals and baby purchases) was I am debt heavy. This is mainly my student loan, but also my car repayment and pension fund that took me way above the 20%. My second thought was about my lifestyle choices spending. From the items that I had budgeted in this category, it was actually under the 30% allocated (I should be spending more money on fun experiences!). But once I factored in the ATM withdrawals, this category quickly filled out. Largely I didn't know where this was going or what it was buying me. It certainly wasn't being spent on the priories I had noted in my goals.
So what would you do? The first thing was to start keeping a log of cash spending to determine what you are spending and what it is buying you. It was a bit of a faff, but even after a month, it really helped to see how all those small purchases add up. In my case, between lunch at work, several trips for coffee and a reasonable helping for snacks, my cash 'disappeared'. There was also a little going to charity (which I would have forgotten about) and contributing to gifts with work colleagues. Aside from the latter two items, there was plenty to cut, or substitute for something more cost effective (I have started taking home made hearty sandwiches or similar to work, and brew my own tea).
Other significant discretionary spending included eating out and fuel for the car (not to mention service and insurance costs). I cannot really do much about the fuel costs, public transport is not practical for most things where I live. I probably could cut back on dining out, but I do enjoy catching up with friends over a pub lunch. Dining at home is fine and everything, but really doesn't scratch the same itch. Perhaps the lazy quick lunches at Subway could go? I tend to go when I cannot be bothered to prepare anything or the fridge is bare. I should probably but a bit more effort in here, but as long as I keep this to a sporadic treat (once a fortnight?) I don't see this as a problem?
Next up was my debt, which is more of an issue (I am in my 30s, married with one child and still paying for my education!). I still have a few years left paying down my student loan, but this was less than I expected when I checked (but a lot longer than I would have liked). Car payments make another dent in this section, but will be coming to an end in a few months. I do also contribute to an employee pension. That may not sound like a lot, but it quickly swallowed the 20% allocated for financial priorities. I have decided that I could take the savings from prepared lunches and coffee above and put this towards paying off these debts, and combine this with some of my savings to make a few overpayments (savings rates are extremely poor anyway). So, whilst there was no magic solutions to clearing this debt, the overpayments make a real difference. In four months time, my car payments will stop and I will use that money to further pay down my student loan. With any luck (well... mostly planning) by December 2014 both my car loan and student loan will be completely cleared. I will then be in a position to set up an automated transfer into a savings account from the beginning of 2015, and bring this category back down to about 20% of my income. I just need to make sure I don't pick up any new debts in the mean time!
So, where does this leave you? Well, a little planning and thought can go a long way. My essential spending is not far from the 50% allocation. By the beginning of 2015 the financial priorities category will be free of debt and to 20% will be focused on a pension and savings. And the good news, there will be a nice gap in lifestyle spending. That is quite liberating, to be able to have 'spare cash' to enjoy family trips to the zoo, ride on a steam railway or whatever takes your fancy. I still have a big mortgage to pay and future childcare/education costs, but for the moment, I feel quite privileged. There are plenty of other ways to get your spending under control (Whitson Gordon wrote a good article about some more general tips you can use), the important thing to remember is that you need to find one that works for you and your lifestyle.