Everyone knows the importance of saving money: to protect against emergencies, to secure your future, etcetera, etcetera. However, saving money is often confused with penny-pinching. It is not necessary to deprive yourself of things that give you joy to build a healthy emergency fund; It might simply be a matter of allocating your money more efficiently.
The issue most people run into is that they treat saving as an afterthought – you save what you’re left with. Instead, saving should be the first thing you do with your money. Put aside x% of your income every month, and use the amount you’re left with for your monthly expenses.
But, what is the x in the x%? That would vary from person to person, and the first step in identifying that is Understanding Your Money.
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If you don’t know where your money is going, you won’t be able to control its flow. To find a solution, you need to know where the problem is. Track your money for just a month, and you’ll get a wealth of insights into your own spending habits. More often than not, these insights will be a surprise to you and will give you a better handle on your expenses.
Tracking your expenses can sound a little intimidating if you have never done it before, So here are few suggestions:
- Pen & Paper – You can go the traditional way and write everything down in a notebook, or in the “Notes” app on your phone.
- Excel Sheets – For the hyper systematic person, Excel sheets can be a great way to keep your spend in check.
- Apps – Expense Tracking apps are plenty and easy to use.
- Receipts – If you can’t note your expenses immediately, make it a habit to collect receipts, so you don’t lose track of your expenses.
So you have collected information on your expenses, now it is time to analyse this information.
For this purpose, you can categorize all your expenses in themes like this. Of course, every person will have a different method of categorization, but this can be taken as a starting point:
Needs:
- Rent + Bills
- Groceries
- Education
Wants:
- Dining out
- Entertainment
- Shopping
Savings:
Try to sort your expenses often – at least weekly – as the transactions will be fresh in your mind, and it won’t seem so daunting if you only have to sort a few days’ worth of data at a time.
This categorization will help you figure out which areas of your life you’re spending most on, and which areas you’d like to spend more on. Having this information will help you reallocate your funds to reach your personal goals in a more efficient manner.
