Revisit: It’s Simple (isn’t it?)

I am borrowing an idea from my friend Michael James and having a look at some of my older posts, and one of my first posts in 2005 was It’s Simple (isn’t it), about spending. I have put out more than 2000 posts since this early post, but I feel it does seem to hold its own even 7 years later. I’ll admit the writing style is a little more hard spoken than now, but I still enjoy having a good rant now and then! I note I hadn’t figured out how to bold things that well back then (lots of capitalization though).

March 25th 2005 It’s Simple (isn’t it?)

The most crucial and non-negotiable principle of financial planning is to spend less than what you earn. It is an indisputable fact that cannot be overlooked, no matter how complicated your financial plans may be. I am providing this advice free of charge, and therefore, I will not tolerate any comments like “Well, duh!” or any such nonsense. Remember, spending less than what you make is the foundation of sound financial planning, and it cannot be stressed enough. comments like “Well, duh!” or similar phrases. Let’s look at this as the real equation:

Incoming cash – Outgoing cash = SAVINGS (or Losses if negative)

It’s possible that you might be familiar with the following situation: you know how much money you earn, but it can be difficult to determine how much money you spend. Do you have an idea of where your money is going? You might be able to make an educated guess, but in my experience, many people tend to underestimate or even overlook the areas where they’re spending the most money.

I am part of the “Quicken Cult” in that I track most of my expenditures and income in Quicken (no I don’t get any money from Intuit for saying this), and given that I use direct withdrawal to pay for most things, I actually have a pretty good view on what my family spends their money on (I’ll write another article on controlling spending, right now I am more worried about just bookkeeping).

Do you need to use Quicken to do this? No. You can use Microsoft Money, Excel, an accounting practice book, a spiral binder, or just keep your receipts for 2 or 3 months (or as long as you can stand keeping track of all of this). The important thing is that you are keeping track of things, you are watching (let’s not discuss the Heizenberg Principal just yet), and learning about your habits.

“I don’t need to track that, it’s only a coffee.”, think you? NO WAY! Go nuts for a short period and keep track of all that INCIDENTAL spending you have (if you are a smoker, you’ll have a heart attack on how much you spend on those). Let’s do a simple calculation here:

2 Stan Mikita’s Large Coffees per day * 5 days per week * 48 weeks * $1.40 = $672.00

The thing to remember is that this is AFTER TAX money, too. Could you use that much extra a year? If not, mail me a cheque for that amount (I sure as heck can).

The longer you do this “watching” of your spending the better a picture you can get about your spending HABITS. If you do it for a month, you’ll have a good snapshot. However, if you do it for 3 months, your picture is a bit clearer (and you are less likely to have “fudged” because you knew you were keeping track), and if you keep track for an entire YEAR, well then you can then plan for an entire year! WOW!!! That’s awesome.

Now that we have all this data, it is time to separate it into categories, the first is easy INCOMING and OUTGOING. Incoming is simple, that is your pay stub (but remember there is outgoing on there as well, taxes, CPP, EI, etc.,), outgoing is pretty much everything else. If you want you can use that big equation:

Incoming – Outgoing = Savings

and see where you stand (and whether it lines up with your bank statement), however, it might be better if you do a little more separation. In the OUTGOING, create subcategories for yourself, here are a few examples:

• Groceries/Food
• Transportation (Car/Bus/Moped expenses)
• Taxes! (no, don’t add up GST unless you are a glutton for punishment)
• Household
• Utilities (if you live in an apartment or condo you might not need that)
• Entertainment
• Miscellaneous (i.e. all that is left)

Alright, so we’ve completed the first step of our financial analysis. We now have a clear understanding of our income and expenses during the examined time period. Hopefully, we can now comprehend the reasons behind our savings or debts. However, this is just the beginning of our journey. We have gathered raw data, which we’ll utilize to create our financial plan.