15 October 2007

Money leaks

I've had a few emails recently from people wanting to simplify but they don't know what their first step should be. No matter what style of simple life you want for yourself, you'll need to have your finances in order, so the first step is to track your money. This is a simple process where you take a small notebook with you wherever you go and every time you buy something, you write it down in your note book. You must be consistent and mark down everything, even the smallest amounts.

You'll get a fairly good idea of what you're spending habits are at the end of a week, but keep your tracking going for a month to get a more accurate picture. Tracking your money might not reveal what's really important to you but it will show you what is important enough for you to spend money on it. You'll discover what your priorities are, what your spending patterns are and you can then use this information to change habits and focus on positive spending, like debt reduction.

I doubt there is anyone who hasn't wondered at some point where their money went in a particular pay period. Often we're so tied up with work, or the children, or things that are happening in our lives that we spend without knowing it. We may also be spending small amounts frequently without thinking how those small amounts add up over a longer period. For instance, if you're buying a coffee every morning on your way to work, or when you meet your girlfriends after you've all dropped off the children at school, I bet you'll be surprised how much that will add up to over the course of a year. If that coffee is $3.50 a cup, that's $17.50 a week, $70 a month and if you buy it for ten months in a year, that's $700 for one cup of coffee. I'm not saying that you should stop having your coffee, but make it at home, put it in a Thermos and take it with you. Or invite the girls back to your home for coffee. If there are four of your, you're all paying someone $2,800 to make a cup of coffee for you. That money could make an extra payment on your mortgage or be saved in the bank for an emergency.

Once you'll got a month's tracking done, look critically at what you're spending your money on. I bet you'll be surprised. Who knew those weekly magazines would add up to $800 over a year, surely your $5 lunch at work isn't costing you $1000 a year, your new mobile phone deal, with all those cute extras, can't be costing $900 a year! It's incredible how all those tiny amounts, when added up, cost far more than we thought and far more than they're worth.

I'm not telling you to give up all your small pleasure, but choose your pleasures wisely and know, really know, what they are costing you. When you know the full cost of something - not just the monetary cost, but also what you have to give up and how long you have to work to pay for something, you often don't want it anymore because the cost is too great.

So if you're wanting to simplify, start by tracking what your spend. It will be one of your first exercises in the self discipline of simple living and hopefully it will show you not only how your money is slowly leaking out of your life, but how to stop those leaks and start using your money to help you live the way you want to live.

Graphic from allposters.com

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