Analysis of your Spending

As the Wealthy Canadian pointed out in his comment to yesterday’s post: planning is only the first step to financial independence. The harder part is doing an analysis of your own spending.

In order to do this well I typically suggest people track every penny of their spending for a month. Only when you have detailed list of spending can you realize where you are bleeding cash, for example I know several people who buy a lunch every day. I just can’t imagine wasting that kind of money. After all my leftovers often smell and look better than what they are eating.

Yet in the end spending is about personal choices and determining what makes you really happy. The problem I find with most people around doing this is they often settle on a mediocre happiness rather than insisting that each dollar brings you the maximum happiness possible at that time. People watch hours of TV thinking it brings happiness. No, it brings a brief escape at best. So often cable is a waste of money. This is not to say in some cases it does bring happiness to some people, just not that many.

Another example is leaving lights on or having a dripping faucet. Both don’t bring any happiness and are just wasting money. Money is suppose to cover the essentials in your life: food, water, shelter and then from there provide for some select luxuries to increase your happiness. The issue with most people is we live such lives of excess we can’t strip things back to the basics and determine which luxuries actually make us happy. I would suggest that most people could benefit from a month of living poor by choice to determine what they really would miss.  Cut your spending in half and see what happens, you might surprise yourself.

So here are some luxury items that bring me lots of happiness:

  • High speed internet
  • Good coffee beans
  • 400+ thread count sheets and a firm pillow
  • Widescreen LCD TV with surround sound – for movies
  • Buying select books

The point of the above list is it works for me. It may not work for anyone else in the entire world.  That doesn’t matter, what matters is finding your own list.  Don’t assume anything is required until you know it is and best of luck with your own spending analysis.

You Are Poor From a Lack of Planning

I come to a realization lately. I’m extremely weird in my ability to perceive time. I really didn’t think about it until one day I was talking to my wife and she pointed it out. I can easily talk about anything that happens at any point in time with little to no mental gear shifting. I can talk in terms of what I’m doing in the next hour, day, week, month, year, decade or what society will do in a million years or did do 10,000 years ago with little effort. I can easily talk about what I’m doing this weekend or in retirement 20 years from now which is a bit of an asset when planning things.

Yet if you take the idea of planning and expand that out I think that is the main difference between people in good financial shape and poor financial shape. The people with good planning are prepared for everything. We aren’t surprised about how much money we spend at Christmas every year, we plan and save for it in advance. We aren’t surprised by a major disaster since we have insurance for it and have a fund to pay the insurance deductible out of. Retirement may not be planned in detail, but you are aware of it and have a bit of saving plan in place.

This planning is what prevents debts from occurring. If you plan for things you will be forced to live more in your means. For example, I estimate I’m putting 8% of my monthly take home pay towards near future events (Christmas, insurance, winter heating) and another 19% towards far future events. I don’t regret this money going towards future events because in my mind it is already been spent. Just in the future rather than now. By doing this you are actually paying less money, since your cash can earn interest in a high interest savings account rather than you paying interest on a credit card or line of credit.

This lack of planning is what keeps people poor. If you haven’t saved for Christmas you feel guilty about it. Then your spending goes over your budget (if you even had one) and you feel even more guilty when your credit card bill comes in and you have to pay it off over the next two months. Then after you pay off your bill you are so thankful for it being gone you go treat yourself and forget completely about your promise to save something for next Christmas. Planning is what breaks the cycle and sets you free.

So how do you plan for an entire year in advance? List every non monthly bill for the entire year on a sheet. You then add it up and divide by 12. That is the amount of money you need to save in a month to meet your short term future goals. Now create automatic transfers out of your chequing account the day after each payday for the correct amount. This will get you started. Be warned you will have forgotten something and will have to increase the transfer amount as you go along for the first year. Then it will typically take you a few more years to have the money saved in advance of your expenses. After all you are currently still in your old cycle and it will at least two more years for it to completely shift over to prepaying everything.

But you might think “That’s three years to turn things around!”. Yes, it is. This is what planning is about. If you don’t want to do it, stay poor and be at the mercy of others for your entire life. Planning is hard work especially in the beginning, but it also means your taking control of your own money so it can work for you rather than you working for it. In the end this is what leads people to financial independence.

This post is now part of the 116th edition of the carnival of personal finance.

Net Worth – August 2007 Update

I know I’m a bit early on this post, but I slept in this morning and it’s my only draft that was close enough to a complete post to use. So here we go.

House $299,000
RRSP $13,200
Old Work Pension $11,600
New Work Pension $2300
Wife’s RRSP $5500
Wife’s Investment Account $8400
High Interest Savings Account $2100

Mortgage $145,700
Line of Credit $0

Therefore my net worth now stands at: $196,400. Overall an increase of +$6,400 or 3.4% from my last check up.

There appears to be a bit of calming in the real estate market here. I’m hearing less stories of over bidding on houses, but the other thing I’m seeing is less listings in my area. So trying to gauge my house market value has been difficult. So this month I’m only increasing the value by $5,000 which is only based on one ‘sort of’ similar house that went for sale in the area.

The stock market slide has also impacted the accounts overall. They don’t look as bad as they should because the cash added to the accounts has been covering their losses overall so I’m at least breaking even on most of the investment accounts right now. I’ve taken most of the extra cash that we had in the old ING account and picked up some more EIT.UN. By the way I made the switch over to RBC’s high interest account, the thought of instant transfers was just too appealing. I guess this is the end for the traditional savings account. One last thing I did in the last while was prepare the mortgage to start accelerating it’s pay off.

So given the cooling in the local real estate market and the slide in the stock market I’m happy with my increase over last time. After all I’m still up by 145% from my net worth at the end of 2006.