Spending is about making choices.
Some spending choices are simple and easy to make, while others may prove to be more difficult. Things you need to know as you make spending and saving decisions include:
- How much money comes in each month?
- Where do you spend your money each month?
- Is there a difference between buying what you need versus what you want?
- What do you want to accomplish with your money each month?
Documenting income sources and expenses: To document your income and expenses, you will need to list all your sources of monthly income and expenses. Make sure to include all the things you spend money on, including eating out, entertainment, and personal supplies – and remember to include savings!
You can use a piece of paper, an electronic spreadsheet or an app to track your spending – it’s important to track everything you spend money on during the month. For example, when you use your debit card at a gas station to buy gas, if you are also buying a soda and a bag of chips, make sure you are documenting your spending accurately. If you don’t correctly document your spending then the money you spend on gas will be inflated.
Understanding needs versus wants: Once you have documented your expenses, it is important to understand the difference between spending money on things you “need” versus things you “want.” Things you need include expenses that are absolutely necessary, such as food, transportation, housing, and utilities. Things you want include optional purchases such as experiences, technology, entertainment, or dining out.
Some items can be both a need and a want. For example, you need to eat, but you can pack a lunch instead of paying to eat out every day at a restaurant. The important thing is to take care of your needs before considering your wants.
Deciding what you want to accomplish with your money: Now that you know where your money is coming from and where your money is going it’s time to decide what you really want to accomplish with your money. For example, if you want to buy a new phone, purchase a car, rent your first apartment, or buy your own home, you need to set your goals.
Knowing how you want to live now and in the future is important for setting financial goals. This will help you clearly describe your spending and savings goals. Once you have set your goals, you will need to create a spending plan also known as a budget.
A few insights from Steve, Judi and Mike about spending on our Save Invest Grow podcast.
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