The way in which small expenses add up is not always obvious.
Have you ever wondered why you can't save money or build wealth even though you earn more money every year?
You're not alone. There's even a name for this nefarious phenomenon: lifestyle creep. As we bring in more income, our expenditures tend to rise in a synchronized fashion. Rather than diverting the extra cash into savings or investment, we buy nicer things or more expensive vacations.
Much of the time we do this unconsciously. Our income rises, so our material circumstances improve - it seems only natural. A closer look at our spending patterns will often reveal plenty of wasteful - or, at least, unnecessary - spending.
This is one reason why a rigorous spending audit is a key component to any wealth-building plan.
The Value of a Spending Audit
First, let's establish one key point - an audit is not a budget. For many people, budgets are aspirational things, not always grounded in reality. We tend to overstate what we spend. An audit, on the other hand, should be rigorous and unsparing. There should be no room for wishful thinking or fudged numbers. There's no point in kidding yourself about what you're really spending - you can't build wealth successfully on a shaky foundation.
In our relentless consumer society, we are conditioned to spend, spend, and spend. Much of the time, we spend money almost on autopilot, only snapping back to reality once cash starts to run low.
This is the value of an audit - it forces us to take a cold, clear-eyed view of our real spending habits.
How To Get Started
Like any auditor, you're only as good as the data you have. You'll need to collect copies of your bills, bank account statements, credit card statements and any other documents that illustrate your spending activity. By doing so, you can discern patterns and habits in your spending behavior. While a month of collected data will provide a snapshot into your spending activity, three months will provide a more comprehensive view.
Go over your list, item by item, in forensic detail. Identify expenditures that were unnecessary, and group those expenditures together. At the end of the audit, add all of these items together, and you'll have a rough approximation of how much money you could route into a savings account or investment portfolio.
You may also wish to track closely your spending on a daily basis. There are a variety of software apps that make this task easy, and even something of a game or challenge. Much like a fitness app challenges you to improve on your daily run, a budget app allows you to track your "savings performance" and reinforces positive behavior in the process.
The Takeaway
Reining in excessive spending is key to creating wealth. By sitting down and taking a serious look at your purchasing habits, you identify and correct the bad habits that are holding you back.
Dort Financial Credit Union is a not-for-profit financial cooperative whose mission is enriching people’s lives… members, employees, community. Unlike other financial institutions, credit union ‘profits’ are returned to the membership in the form of lower loan rates, higher dividend rates, and affordable services.
