How much are you spending on coffee?

I’m going to make this super, super simple… and you all know it, but I, personally, have a tendency to ignore forget it:

If you want to save money, you have to spend less than you earn.

A basic, calculable truth that is so easy to forget, ignore, or pretend it doesn’t exist, especially in today’s world of buying everything on credit (e.g.., “buy now, pay later”, “no payments until 2018”, “zero interest until 2289”). Oh, you don’t have enough money right now for that vacation in six months? Pay it off over the course of the next six months… or in some cases… two years (by the time you actually get your credit card paid off). The only price you pay is the constantly accruing interest that makes it even more expensive, and more difficult, to pay it off!

We will come back to credit card debt issues (a lot…) but in the meantime… let us focus on these basics:

Spending less money than you earn = saving (accumulating wealth… increasing your net worth)

Spending more money than you earn = not saving (debt… decreasing your net worth)

Super easy, right? Almost…

Step 1:

Let’s start with the fun part – earning money! Money comes in – woohoo – getting paid is the best, isn’t it? Calculate how much you make a month – for some people, this will vary slightly from month to month, but do your best to have an approximate number that represents your monthly post-tax income.

Step 2:

Start by making a list of all of your basic monthly expenses – what do you have to pay on a monthly basis:

  • Rent/mortgage payment
  • Utility bills (electricity, gas, water, telephone/cell, cable/internet etc.)
  • Entertainment/Fitness bills (Hulu, Netflix, HBO, gym membership etc.)
  • Transportation (car payment, car insurance, public transportation spending)
  • Debt repayments (minimum payments on credit cards and student loans)

In an ideal world, you are paying off any credit card in full, but that is for another time – let’s just go with the bare minimum expenses for the sake of this exercise.

You have two numbers now – money in and money out. The money coming in should be more than the money going out – especially since we haven’t even calculated daily expenses.

I conducted this overall review of my monthly basic expenditures last year at about this time and realized I was in way, way over my head – my rent, utilities, transportation and debt repayments (minimums only) were just barely under my monthly income. And that was before I even looked at this next step.

Step 3:

Time to look at what you are spending on a day-to-day basis – this is all of the daily expense – the expenditures that fluctuate depending on what is happening in your life on any given day: groceries, dinners out, social spending (drinks, entertainment), clothes, vacations, Ubers – the list goes on and on.

If you use cash, this is a harder exercise to do…. But seriously, who uses cash these days?! I am pretty sure that the last time I had cash on me was 2005. Anyways… if you use cash, you will have a lot more work to do in calculating your daily spend. For everyone else, this will be a bit easier to do.

I found that the easiest way to do this was to literally go through my bank statement (I was only using a debit card) and physically categorize (highlighters, my friends, highlighters) each expense over the course of one month. I was getting paid monthly, so I went from payday to the day before the following payday. If you are getting paid weekly, or bi-weekly, pick something easy like the 1st or the 15th.

I put my expenses into 6 categories:

  1. Food (groceries)
  2. Lunches/Coffees (work-adjacent food)
  3. Entertainment (dinners out, movies, drinks, Ubers home after a night out)
  4. Vacations/Travel
  5. Beauty/maintenance
  6. Shopping (clothes, presents)

These categories were developed as I was going through my expenses (going back six months) – I saw some pretty scary patterns, which emerged in the form of category #2. You may find that adapting these categories is necessary – you could combine #5 and #6 or add different categories that fit your lifestyle. The idea is to be able to look at your expenses in a more holistic way – one that will allow you to re-adjust your spending habits and priorities.

The exercise (particularly going back six months in time) was very enlightening – I had a vague idea of my spending but there were some serious surprises when I took the time to dig deep into my actual spending habits. The amount of money I was spending on lunches at work and coffee (on the way to the office, during the day, all the damn time) was astronomical – about 2-3 times what I thought I was spending.

If you look at your spending for the last month, three months or six months, you should have a better idea exactly where your money is going. If it is going to things that you don’t want to make a financial priority, you now have the clarity and insight to start making some changes. For me, that meant prioritizing repayment of debt and saving money – the subsequent change in spending was to bring my own coffee and lunches to work – on average, I am saving about $500 dollars a month that I was previously dropping on coffee, lunches, snacks at the office – that is a TON of money!

Don’t get me wrong – I still buy a pack of Starbursts every once in a while and if I run out of coffee at home, I swing by Starbucks on my way into work… this is about finding the right balance between fun and fiscal responsibility. And remember, just because you are going through this exercise doesn’t mean you have to make any fundamental changes to your spending or saving practices… the greatest value comes with just realizing exactly where your money is being spent.

After having looked at your money coming in and your money going out, you can start to think about ways to spend differently, more effectively. Should you be cutting back on your shopping in favor of paying down high interest credit card debt? Should you limit your Uber spending to $50 a month instead of $125?

Start thinking about it, my little kittens… our next stop is looking deeper into your debt, thinking about your budget and ways to curb certain spending.

Sincerely yours in harmonious fun and fiscal responsibility,

Rachel

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