The Money You Spend

[BookClubEditor]

If you were reading a book on losing weight, what would be the first thing you would be asked to do? Write down what you're eating, right? In order to get more out of your spending, we're going to do just that.

The Net Worth Workout divides spending into three categories: fixed, variable, and discretionary. Think of your fixed expenses as your meat and potatoes, your variable expenses as the blueberries you may add to your cereal, and your discretionary expenses as that glazed doughnut.

It's interesting because most people tell me that they don't spend very much, but when they do these exercises they're amazed by what they're really spending. In fact, most of us underestimate how much we spend by about $500 to $1,000 a month.

Fixed Expenses: Your Daily Fiber

Let's begin with the fixed expenses. This part might not be particularly exciting, but you couldn't survive without it. Some examples of Fixed Expenses are housing, groceries, utilities, transportation, insurance, medical/dental, child care, and real estate taxes. Write down as many as you have. You may need to take out your bank account statement, credit card statement, and checkbook to create a list of your own monthly fixed expenses.

Variable Expenses: What Makes Your Meals Tastier

If these were food choices, they would help you enjoy your meals more, like the banana on your oatmeal. They're variables in your life and they're enjoyable. Some examples are new clothes, dry cleaning, haircuts and cosmetics, your cell phone, home maintenance, health or golf club memberships, and using professional attorneys or accountants.

Discretionary Expenses: Your Indulgences

Finally, we have the things that are great to splurge on. They're the potato chips you have at lunch or the brownie sundae you have for dessert. You can live without them, and there are plenty of times you deserve them, just not all in one day. Discretionary expenses could include entertainment, restaurants, bars, nightclubs, collecting (antiques, wines), gambling (lotto, office pools) and salon services (massage, manicures). List 10 of your discretionary expenses. This is sometimes a bit more complicated for people and usually they're surprised to see the difference. They're the reason why you may feel like money just flies out of your wallet.

Now, compare the totals of your fixed expenses to your discretionary expenses.

Just as we have power over our food choices each day, we have power over our spending. But before we can exercise that power, we have to answer the Great Spending Riddle: What does your lifestyle cost you each month? Once you've answered that question, you'll be able to make adjustments that will let you maintain what's important to you.

Remember that we can spend money very unconsciously. Marketers field hundreds of thousands of surveys to see what makes people buy. Another thing that influences how we spend our money is the stress/spending paradox. We all feel stressed, go shopping, then feel compelled to work harder at our jobs to pay off what we just bought, and consequently increase our stress.

The Lifestyle Log

The Lifestyle Log is truly the backbone of the Net Worth Workout. Once you've done this exercise it's really going to help you get a grasp on where your money goes.

Most of us receive annual statements from our credit card companies. The problem with that is what? They're annual! We receive it, usually when we're preparing our taxes, look at it, and then file or destroy it. That's it -- we don't look at it again until the next year. It's the same as stepping on a scale once a year or even seeing a summary once a year of what you ate. You need to monitor it more often to improve your results.

Page 106-109 of The Net Worth Workout describes the Lifestyle Log. The easiest way to start is to go through your bank account, either online or through your bank statements, and get the figures for your mortgage/rent, electric, oil, homeowners/renter's insurance and so forth.

Once that's done, move on to your variable (useful and enjoyable: new clothes, gym memberships, etc) and discretionary (mostly for entertainment: pricey restaurants, gambling, nightclubs, etc) expenses. For these expenses you'll probably need to go back to your credit card statements and perhaps estimate expenses from what you paid cash for. (Or you can also keep a daily log to get a sense of where you cash goes over the next few days).

Also, to see where your money is going, commit to doing the Lifestyle Log every quarter, so Oct-Dec is one quarter, Jan-March is another, April-June, and July-Sept. The reason this is important is you'll see patterns that are seasonal, to know your annual Lifestyle Log. The cost of shoveling snow or having an air conditioner repaired isn't likely to show up on the same bank statement. Neither will buying back to school clothes and holiday presents. The power of the Lifestyle Log is knowing what your Lifestyle costs throughout the year, not during one particular month.

Finding Your Own Leaky Wallet Syndrome

The reason why the Lifestyle Log is so helpful is that it helps fight Leaky Wallet Syndrome. After you've completed the Lifestyle Log you should learn that some, if not a large amount, of your money is going to stuff you really don't care about.

It's a very personal self-discovery exercise that you need to do for yourself. Some things will very quickly surface as Leaky Wallet Syndrome. On the other hand, some things you'll want to weigh if the enjoyment you get from them is worth it to you. Until you find and measure your wallet's own personal "leaks," you can't fix the problems.

Once you have a better idea of where your money goes, it will be easier to see how we can make it work better for you. Your goals should be very specific. Instead of saying, "My goal is to pay less on housing," your goal could be "to reduce my home maintenance costs by $200 a month in the next three months." You want to target areas where you spend more than you expected before you did the Lifestyle Log, so we'll focus on the variable and discretionary categories.

Make a list of your spending in these two categories and add up the total of each.

Next, set goals for yourself to do two things: First, pick either a percentage or dollar amount that you're going to reduce this spending by. Second, take the amount you've committed to and automatically have it go to an account that you don't have access to through an ATM or other accessible way. If you must, you can also physically take the cash and put it in a jar. The key is to do this every week for the next month.

Another thing to be aware of is that your goals should be realistic. It wouldn't make sense to try and reduce your variable expenses by 50% next month. You're just setting yourself up for failure. On the other hand, if you make your goals too easy, like to save $25 a month, it won't serve much purpose either because you didn't have to stretch to achieve it.

You're Always a Winner

Let's say you set a goal of reducing your discretionary expenses by 20% this month. Then, at the end of the month you find your Leaky Wallet Syndrome has only gone down by 15%. Of course you're disappointed -- you didn't reach your goal and you felt it was realistic. But you did spend 15% less than you did the month before and that's a victory!

Discussion

1. What are ways that you're vulnerable to spending on impulse?
   
   
2. What would you say are your "financial stress fixes?" What can you do to deal with this?
   
   
3. Are there particular stores that always seem to get your money? What are some things you can do about it?
   
   
4. How did your fixed expenses compare to your discretionary expenses?
   
   
5. Were your discretionary expenses higher than you expected them to be?
   
   
6. What are some ways you can reduce spending without restricting your lifestyle?
   
   
7. What was your main Leaky Wallet Syndrome? Were you surprised by what it was and the amount? Why is that?
   
   
8. Has reducing the amount you spend on this changed your life in any way? Has this change been positive or negative? Please elaborate so others can learn.

[BookJunkie]

I have to say, not too long ago, for one month, I wrote down Every Penny I spent, as faithfully as I could, every day. What a shocker! I don't get the daily Starbucks, rarely buy lunch, and have a good handle on what my monthly expenses are, so I half-believed that my level of frivilous spending was less than the average person. WRONG! It's amazing how one dollar here for some fruit and five dollars to chip in for the taxi ride can totally add up ... to the point that you actually feel it long before the next paycheck comes. I learned one of the quickest ways to save a few dollars: ATM fees. Now, once I get paid, I take out a few hundred dollars (from My bank), and leave most of it at home, only taking what I'll need that night. My new ATM is an envelope on my dresser, and based on how frequently I was going to the ATM, I'm saving at least 40 bucks a month.

[BookJunkie]

A friend of mine sent me this link today.

20 Things to Get Before You're 40:
http://lifestyle.msn.com/MindBodyandSoul/CareerandMoney/ArticleMC.aspx?cp-documentid=1203069>!=8782

Without building my soapbox too high, I have to say, this kind of thing is really misguided, especially in re: younger (in this case) women who don't have a clue about how to handle their finances. Just another reason to follow Sue's advice and learn to recognize when we're being manipulated into living a lifestyle we neither need nor want. (Not to mention how insulting this is...that's a whole other conversation...)

Message Edited by BookJunkie on 11-07-200611:29 AM

Message Edited by BookJunkie on 11-07-200611:29 AM

[emily_card]

I agree that the advice offered in Susan's book is much more practical and attainable than much of the financial advice written, even than many bestsellers. Emily