Tracking your spending is one of the best ways to get control of your finances. As soon as you understand exactly where your money goes, managing it will become a whole lot easier. You will be more conscious of your spending habits and possibly reconsider some lifestyle changes.
Recording your every expense
Yes, every single one! It also includes going through your account statements and acknowledging spending that goes through direct debits, such as monthly subscriptions. When you take the time to manually document your spending, you will have to acknowledge each and every cost. You can do this by documenting in a notebook, spreadsheet or using a tracking app.
Now that you are recording everything, take the time to go through your expenses on a wider scale and find patterns in your spending. You might think a S$5 drink is relatively affordable at the time, but when you see it from a wider scale, those S$5 drinks add up very quickly. You might also face unexpected unnecessary spending like repeatedly having to replace your phone charger. When you acknowledge these patterns, you can decide which spending habits to eliminate or find solutions to avoid some (like allocating your phone charger to a designated spot).
50/30/20 Rule
Popularised by Senator Elizabeth Warren, this rule splits up your after-tax income into 3 parts—50% for your needs, 30% for your wants, and 20% into your savings. Needs are defined as must-do expenses such as rent or mortgage, insurance, groceries and so on. As for your wants, these are things that make life a little more comfortable such as dining out or entertainment subscriptions. Opting for an upgrade, such as choosing a more expensive meal, is also considered a want. Savings can include contributing to debt repayment, building an emergency fund or investing in your retirement.
Of course, this rule should be personalised as it is based on Americans’ spending. As many young Singaporeans still live at home, their money allocated for needs could be a lot less than 50%. And maybe you are saving up for a downpayment, so you may want to increase your savings percentage. However, if you are struggling to meet the standard percentage split, it is important to pick out which of your spending can stay and what should go, like possibly giving up your car to take public transport to work more often.
Sticking to your spending habits
Adopting the 50/30/20 rule or any other financial rules will be hard to adjust to, initially. You will have to be flexible with your spending or make the rules more fitting for your lifestyle. But, part of tracking is learning to be strict with yourself too. Before every purchase, think about which area it fits into and if you can account for that in your budget.
If these rules and habits are difficult to remember, make them easier for yourself. For example, to follow the 50/30/20 rule, avoid letting yourself have access to all of your income. Set up automated transfers to different accounts as soon as your pay-check comes in. And get rid of some temptation by walking a different route instead of passing by your favourite bubble tea spot!
Accountability buddy
It might be harder to keep control of your spending especially if your peers enjoy going out often and are less focused on their spending. This does not mean you should cut off your friends, but learn to manage your money better when spending time with them. Additionally, it is highly beneficial to connect with like-minded peers through social groups or find an accountability buddy! This way, you can discuss struggles or celebrate wins with someone, which will encourage you to stay on track! However, be aware of the sensitive details you share—avoid giving out any specific numbers!
Reward yourself!
Taking full responsibility for controlling your expenses is hard work! Do not forget to give yourself a break and celebrate your progress by treating yourself once in a while. This could be an inexpensive activity or item that you might have previously cut out from your spending. Treating yourself will only motivate you to continue working hard towards that next reward!
Remember that this is a difficult task especially when you are first starting out. Progress is not linear, so do not feel too guilty when you find yourself slipping up on your spending.
At KWO, we love helping people achieve financial health and we hope you find these tips beneficial. If you find that you have already adopted some of these habits and would love to help others make informed financial decisions too, join us today!