In my previous post, I encouraged you to monitor your accounts in an effort to track your spending habits. Today, I will explain why this is one of the most important steps in your personal finance journey. Assuming you have done your tracking, lets jump straight into it.
Tracking your spending is key because it builds a foundation for the goals you set for yourself. I think this is best illustrated with an example, so let’s say there are two people, person A and person B, both making $500 per week ($2000/month, $24,000/year). For simplicity’s sake, let’s clump all necessary living expenses (rent+utilities, car payment, groceries, insurance, etc.) together as roughly $1500 per month. That leaves you with $500 left over every month to use at your discretion.
Now let’s say person A likes to have a $3 Starbucks coffee every morning while also spending an average of 50$ a week on drinks and dinner. Person B makes cheap instant coffee which is included in their groceries, and only goes out to eat / drink once a month, also spending $50 when they do.
Although they both make the same amount, person A saves about $210 per month and person B saves about 450$ per month. This demonstrates the saying “it’s not about how much you make, but how much you save”. Person A is left with yearly savings of $2520 while person B has more than double at $5400.
Although this is an extremely simplified example, and everyone’s expenses will be different, I hope this serves as a lesson for you as it did for me. I realized that by eating out less, slowing down on drinking, or even just giving up premium coffee, I could create a profound effect on my expenses, resulting in having more money left over. With that being said, I encourage you to continue tracking, as well as making an effort to cut out small purchases. In future posts, we will cover a variety of ways to put this extra money to work, or “invest”, if you will!