Sunday, April 28, 2013

How to Control Spending

One of the key areas of controlling your finances is to control expenses. To many, this might be a very obvious point, but in reality it is much harder to do. We all know that the less you spend the more you can save, but do we really apply that advice? How many of us can put off instant gratification so we can save?
Revenues and expenses

The problem boils down to psychology. Our present selves view our future selves as complete strangers. Because of this, we tend not to take our futures too seriously. We do things and expect our future selves to fix the problem. Sound familiar  Take diets and exercise. We choose to eat poorly and not exercise, we gain weight. We know we should exercise and reduce the amount we eat, we know that if we don't we will develop health problems, but we can do it later. We wholeheartedly expect that our future selves will fix the problems. The failure of this method, this thought, is that we are the future selves, and eventually (as will all people) we won't have a future self that will fix the problem. 

To go back to my point, how do we control spending? The easiest way to do it is to track spending. Record every time you spend money. This sounds very tedious, but it is illuminating. Do this for one week, and you will be amazed on what you spend. Many times, we swipe our cards and not thinking about it. These purchases, the ones we do without thinking, cost us the most. The goal of this exercise is to make us conscious of our spending. 

After doing this for a few weeks one will become more aware of the flow of money. This is a key point of taking control of your money. YNAB helps, because unlike other software (Quicken and Mint) you have to manually enter each transaction. Quicken and Mint automatically categorizes your transactions. This means your daily routine of analysing your finances becomes nothing more than viewing graphs and making sure your software categorized everything correctly. 

One final method of controlling expenses is to use cash. Cash is finite. How hard is it for you to break a hundred dollar bill? You are more frugal when your wallet is filled with hundred dollar bills than with singles. You can visibly see your money deplete, and once it is gone you cannot spend more. If you combine this method with tracking your expenses (either using a spreadsheet, Quicken, Mint or YNAB) you will see an increase of funds within a month. My wife and I noticed an increase of $200.

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