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Money Matters: Be Honest With Yourself

A major step toward financial freedom is about getting back in touch with your money and understanding that you have the power to decide how to use it. And it's about being honest with yourself. Have you ever taken a big wad of bills from an ATM machine, then found yourself, a day or two later, nearly out of cash and unable to reconstruct exactly where you spent it? And even when you retrace all your steps, you still come up $20, $40 or $60 short? It's upsetting, but most of us feel that way most of the time: a little short, a little panicky, wondering exactly where our money is going.

Where Do You Think You Stand Today?

What does it cost you to live each month? If you are married or living with someone with whom you share expenses, please ask him or her to write down the answer to the same question. Most of us believe we need about $1,000 to $1,500 a month less than we actually do need to go on living the exact same way we live right now. Surprisingly, this figure seems to vary only a little bit regardless of income levels. Where does this month-to-month self-deception lead us? Into financial chaos. Often, our planned spending doesn't cover expenses that don't occur every month or expenses that just crop up.

For example:

  • Do you consider the cost of your gym membership per month even if you pay to renew just once a year?
  • Do you pay your insurance premiums twice or four times a year? Do you calculate the cost of insurance in your monthly bills?
  • Where did you go on vacation last year? What did that one-time expense cost average over twelve months?

These big expenses hit once or twice a year, probably surprising you every time. And then there are seasonal expenses:

  • Come summer, do you forget about how much higher the gas bills run in the fall?
  • Do you have your windows washed once or twice a year?
  • Did you send your children to summer camp last summer
  • Do you get your hair cut and maybe colored every couple of months? How much, then, does it cost every single month?

Here's another surprise: If you make some sort of payment every week—child care, a cleaning woman, a mortgage payment withdrawn automatically every two weeks—the extra weekly payments will take place in four months of the year. Plus the smallest expenses add up fast—the ones too small, you might think, to be worth figuring into your budget at all. For instance, do you go to the movies once a week? When you do, do you buy the tickets for yourself and your partner, have popcorn and sodas, go for a simple dinner afterward, as simple as pizza or a burger and fries? That's not so much, is it? No, it isn't, not on any given Friday night. Maybe $16 for the tickets, $4 for the popcorn and sodas and $20 for a simple meal. But once a week over a year, that's $2,080. And too many of us forget to include expenses so "small."

Other "small" expenses add up just as much. Magazine subscriptions, cosmetics, supplies for the yard, oil changes for the car, batteries for the flashlight, charcoal for the grill: Do you know what it really costs you to keep your life running smoothly over a year's time? How about special occasions? How many birthday parties, house warmings and baby showers did you attend last year? Didn't you bring a present to each one? Might you have done that twenty times or more last year? Finally, you need to allocate $50 to $100 each month for miscellaneous unpredictable expenses: dental work that's not covered in your insurance, travel to your brother's wedding. Most of my clients are shocked to discover by how much they have underestimated—and that's when they've guessed as honestly as they can. It's a scary realization, but there's a wonderful flip side to that fear. Once you take this step, you will feel better for knowing the truth. And you will begin to gain power over the money that's controlled you for so long.

How Much Is Going Out?

Get out your canceled checks, ATM statements, credit card bills, whatever will tell you how you spent your money over the last two years. These papers are more revealing than a diary; they contain the key to how you live your life. Yes, it will take you some time to do this, but think how much time it will give back to you in the future. You work 40 hours a week or more to earn your money. Take a few hours to take your money out of the darkness, to see it in the light of reality, to see where you stand. Don't just read these pages—pick up a pen and take action.

  • Go through your checkbook, canceled checks, computerized statements, all your records for the past two years. Not one year, but two years. Maybe this year was an extraordinary time - you remodeled the house, bought a new car—but looking at a two-year period, you'll get a good idea of what it costs you to live the way you are living. All your checks, cash withdrawals, money spent every month, money spent once a year, money spent once a season, holiday expenses, everything.
  • Make categories for each month—such as telephone, gasoline, food, utilities, vet bills, golf fees, baby-sitting.
  • After all the categories are complete, total each category. Divide each category by 24. This will give you how much you spend per month on average for each category.
  • Now add together all the averages in each category. This will tell you what it costs you to live each month. Remember, these are averages. If your average is $3,000, most months you'll spend less—say, $1,800 or $2,000. But in some months you'll spend $5,000 or $6,000. To meet your expenses, you need to bring in that average number each month.

How Much Is Coming In?

Now write down now all the income from every source that you have coming in. Only calculate an amount you are fairly certain will continue coming in for at least one more year.

  • Monthly paychecks after taxes
  • Predictable bonuses
  • Social Security income
  • Disability, rental and retirement income
  • Gifts from your parents or children, if you can really count on them year in, year out
  • Loan repayments, if they will continue for more than a year

Take this total and divide it by 12, so you can see what you have coming in after taxes on a monthly basis. If you're like many of us, you've just confirmed that you spend more than you thought. Quite possibly you also spend more than you earn. What can you do? You can do one or both of two things: Make more money and/or decide to spend less. Look at each of your categories again, and decide how much in each category you want to spend. If you're spending more than you're earning, this solution is not about creating limitations. It's about making decisions—determining what you most want to spend your money on. If you can make more money realistically, then you're in a position where you may be able to earn what you spend and go on living the way you do right now. If you're like most of us, however, more likely you need to decide to spend your money differently. This does not mean that you have to take one drastic action that crimps your pleasures and quality of life, such as getting by with one car when you family needs two. Consider, instead, making the decision to spend $25 to $30 less per month from 15 or 20 of your spending categories. Some categories are fixed.

There will be other categories—in fact, the majority of categories—where you can actually decide what the total spent per year will be. Is there one magazine subscription you can do without? Can you have three Friday movie nights a month instead of four? Keep deciding to trim a little here, a little there, until what comes in matches what goes out. With each decision you make, you are gaining power over your money. Put down in writing the yearly total you decided on for each category. Now keep track of what you spend in each category, month by month. Create a chart or system that will work for you. Each month when you pay your bills, check your spending by category. If you use up any allocation early and want to spend more in that category, you'll have to make new decisions about what, if anything, you want to do by seeing where you stand with the other categories.

As a reminder, post the categories you're trimming in your planner or on the fridge. You may find—as have many of my clients—that you can come up with wonderfully creative ways to trim your spending so that you hardly notice. One family (both parents work and their teenage kids aren't home much) now has the garbage picked up every two weeks instead of every week, trimming a painless $200 a year. A single mother now goes to the grocery store every eight days instead of every single Saturday, simply paying more attention to the food she already has in the house. Last year she trimmed nearly $400 from what she allocated for food. Another client, who described himself as a "compulsive spender on CDs," now weeds out the CDs he doesn't listen to much anymore and trades them with friends. Last year he trimmed $600 and had just as many fresh CDs to listen to. That same client also now does his taxes himself with a computer program, rather than going to his accountant. Savings: $600. Bur only when you see in front of you how you spend your money now will you be able to decide how you would rather be spending your money. This is the hardest step toward financial freedom. With this step you have been honest with yourself. Now you know exactly where you stand. Rather than being dictated by a restriction, your actions—and your money—are dictated by the choices you make.

Suze Orman is a best-selling finance author. She has appeared on Oprah, two PBS specials, QVC, CNN, CNNfn, CNBC, Good Morning America and is a columnist for Self magazine and a regular contributor on NBC's Today show.

© 1999 Priorities: The Journal of Personal and Professional Success and Franklin Covey. All rights reserved
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