Understanding when your surplus (ie spare) money is really for spending, and when it isn’t.
Recognise this train of thought?
“It looks like I have money in my account, so I’m sure I have enough to buy X”
Most of us have had this thought more than a few times in our lives, as we feel the emotional pull of something we want rather than need.
We know we want that thing, but we don’t really know whether we can afford something, especially if our account balance looks healthy enough.
And we could be just one spending decision away from financial disaster, if we haven’t allowed enough cash for an upcoming bill or emergency expense.
Spending decisions based on how high or low your account balance are basically a guess at best. They are crossing your fingers and hoping you have enough to cover everything. Winging it.
Making spending decisions based on your bank balance is fundamentally flawed thinking because without a benchmark – a comprehensive spending plan to compare your balance to, and one that factors in all your unpredictable and long-term expenses – you can’t really know whether you have ‘spare’ money or not.
And if you spend cash that’s not truly ‘over and above’ your expenses, then it’s only a matter of time before you’ll have to reach for a credit card to cover those unpredictable or long-term expenses, leading you into, or further into, debt.
Spending decisions based on how high or low your account balance are basically a guess at best. They are crossing your fingers and hoping you have enough to cover everything. Winging it.
Case Study – Camilla
Camilla, a client of ours, earns great money as an IT systems manager, and she always seemed to have enough spare cash around to take an annual trip home to England and to pursue her absolute passion of equestrian riding.
The problem was that over the years Camilla hadn’t factored in unpredictable expenses like household service repairs, illness and car repairs and then had to reach for credit cards a number of times to cover these things.
After 10 years she found herself $16K in debt. Having a comprehensive Spending Plan has changed everything for her because now she’s able to see exactly what she has left to spend for discretionary spending.
We separated out her predictable from unpredictable expenses, including her goal of paying down her debt in the fast possible time, and now she can see exactly when she is over or under ‘target’ on any given day of the year.
She now knows exactly when she can afford to take a holiday, go out to dinner, or buy a new horse without sending herself backwards, and she’s been able to pay off a significant amount of her debt.
Our Advice
Spend some time gathering ALL of your expenses (the predictable, regular monthly or annual expenses, the long-term expenses for replacing or repairing items, and the unpredictable expenses).
We have a couple of tools that will help you with that process: Our transaction checklist document which you can download for free HERE, and our Snapshot tool, a calculator where you can input all your annual expenses and income and it will give you a snapshot view of exactly where you stand right now, financially.
Once you have a basic handle on exactly what your expenses are then you can add your income.
Now, what’s the difference between your income and expenses? Are your expenses now exceeding your income?
If they are, then you need to spend some time going through your expenses, trimming or eliminating anything that isn’t high priority right now.
It can be hard to let go of things that you are used to living with but this is an essential piece to your financial management success. Just remember that you won’t need to cut things out forever. I’m a big believer that you can have everything that you want in life, you just can’t have them all at once.
If your expenses don’t exceed your income, then you need to decide what you’re going to do with that spare cash. And give it a job before it gets frittered away on nothing special.
How much of your surplus cash are you going to contribute to long-term goals like saving for a home deposit or for investing?
Once you’ve worked through these steps you’ll know exactly how much you have left to spend on more discretionary items like eating out, homewares and travel.
The above process won’t help you with the day-to-day habit of sticking to your plan, of course, (that’s what a comprehensive Spending Plan does, and what we help our customers to establish and live with) but it will give you a very good starting point.
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