Buying coffee at the nearest coffee shop - good, saving on it - even better. Many people know the fact that giving up daily coffee purchases in the morning can help save some amount of money. If you calculate it for a month, it doesn't look impressive. But if you calculate it for a year, then those funds could have been (the key and at the same time sad word) invested in the same investment portfolio or saved for a rainy day. That's how my journey of financial tracking began.
It seemed to me that expenses such as coffee, prepared food, taxi rides didn't really affect the budget as a whole. But towards the end of the month, I would ask myself: where did the money go?
Every month, I would plan my budget in notes. I would calculate how much would go towards mandatory expenses and how much towards discretionary expenses. It was simple: I would write it all down, get my salary, pay the bills, and then I would have a remaining amount that I could spend freely. But here's the problem: the money would run out much earlier than it was supposed to.
Where to start?
Before planning, it's important to understand a simple thing: what should be classified as mandatory expenses and what as discretionary expenses. This was the main mistake I made month after month. For example, I considered groceries as discretionary expenses. I didn't have a budget for them, so I could spend as much as I wanted. Coffee every day? Sure. Eating out or buying prepared food? No problem. Then I would check my bank app and see that the categories "Restaurants", "Entertainment", and "Groceries" were taking up most of my expenses.
The "Groceries" category is an important and necessary category. But it should not account for half of your budget. If that's the case, then you need to think about what exactly you are buying, whether you cook from what you purchased or if it's all prepared food. A lot of groceries end up getting wasted because they spoil, and so on. The categories of "Entertainment" and "Restaurants" are more understandable: they fall under discretionary expenses. It's important to realize that these expenses can significantly impact your budget, and they can and should be reduced.
Mandatory and discretionary expenses
- housing payments;
- loans and debts;
- insurance, vehicle maintenance.
- taxi fares;
- food delivery;
- spontaneous purchases, etc.
Mandatory expenses cannot be postponed for any period of time. For example, gas payments cannot be skipped for the current month, as it will result in debt for the following month. This characteristic distinguishes them from discretionary expenses. For this reason, it is important to start with mandatory expenses. You can refrain from spontaneous purchases and make a list of necessary items before going to the store. This will help you save money, which can be deposited into a savings account or invested in an investment portfolio.
What to record and where
The simplest way is to create an Excel spreadsheet, divide it into mandatory and discretionary expenses, and allocate them on a monthly basis. It's important to consider all the expenses that your money will go towards in the next month. You can also go into more detail by categorizing your expenses. The key is to set a budget for each category based on your income. There are also apps that already have predefined categories and automated budgeting. All you need to do is enter your expenses on a daily basis.
The next important rule is to consistently keep track of your finances and not neglect it. It may be difficult and unfamiliar at the beginning, or on the contrary, it may seem like you understand everything and wonder why you should spend time on it. However, in reality, financial organization is important because we earn money through our hard work, which should not be devalued.
- Understand whether you are in a situation where your money is running out before the end of the month.
- Identify where your money is going and what to do about it.
- Start keeping track of your finances.