海角大神

Naomi is trying to get a good picture of her actual spending and is using a very good process to get there. She鈥檚 run into a bit of a snag, though.

听

I have reached a month of collecting receipts and preparing to organise it all in an Excel spreadsheet. Categorising by what type of expense will not be the difficult part for me, however deciding weather it was a 鈥榥ecessary鈥� spend is. I鈥檓 finding too many grey areas. For example; it was necessary to eat lunch but instead of having an at home sandwhich, i grabbed one on the go. Or, i needed some new clothes for work and brought a nicer dress than was necessary. Maybe I am overthinking such a simple exercise a little too much, but I would appreciate any direction you could provide.

听

This is a classic problem that people run into when they鈥檙e first getting a grip on their finances. What exactly constitutes a necessary expense? If you don鈥檛 buy the low-end garbage bags and instead buy the ones that Consumer Reports calls a 鈥渂est buy,鈥� is the difference in cost a necessary expense? If you鈥檙e caught in traffic and can鈥檛 stop at home for dinner before an evening meeting, so you stop at a fast food restaurant, is that a necessary expense?

I can certainly give you my opinion on a lot of such buying situations, but the truth of the matter is that 颈迟鈥檚 my opinion. I鈥檇 call the garbage bags a necessary expense. I鈥檇 call the fast food an unnecessary expense, a cost that results from poor planning. And on and on and on鈥�

Here鈥檚 the truth. Every single one of us is going to spend money on something that we view as necessary and that others view as unnecessary. Almost all of us are going to spend at least some money on things that we view as unnecessary upon later reflection.

What matters isn鈥檛 that we eliminate all unnecessary spending from our budget. That鈥檚 impossible. It鈥檚 the equivalent of eating nothing but lettuce for a diet 鈥� eventually, you鈥檒l either wither or fail.

What matters is that we get a grip on our unnecessary spending, however we define it.

I usually encourage people to be pretty tight with their definition of what a necessary expense is, because the real value in budgeting is to figure out where all of your unnecessary expenses are going. What areas are you dumping money into that, with some forethought and changes in routines, you could improve?

Here鈥檚 an example of what I mean. Let鈥檚 say you鈥檝e decided to count lunches eaten out as an unnecessary expense. You make a category in your accounting of your spending called 鈥渓unches eaten out.鈥� At the end of a month鈥檚 worth of receipts, you look at that total. $250? What?

You can reclaim that $250 (or at least most of it) by simply changing one behavior. Stock your desk with the materials for some lunches on the fly, for one, and then get in the routine of brown-bagging it. If things don鈥檛 work out with the brown bagging for a day, you have some food in your desk as a backup. Boom! Suddenly, you鈥檙e not dumping that money into eating out all the time.

That鈥檚 how budgeting is supposed to work. You group all of your expenses into categories and look for ways to sharply cut some of the areas of unnecessary spending (like the lunches) while also looking for ways to reduce the costs in necessary areas (energy efficiency, for example). It is much easier to identify ways to cut your spending if you鈥檙e looking at the exact dollar amounts you鈥檙e spending in a specific area and are focused on that specific area.

In other words, don鈥檛 focus so much on what鈥檚 necessary and what鈥檚 unnecessary, at least not at first. Just try to group things into piles that make sense to you. Budgeting books often offer suggestions of categories, but don鈥檛 be afraid to go beyond them and have categories like 鈥渓unches eaten out鈥� or 鈥渃omic books鈥� or 鈥渕akeup鈥� or 鈥渧ideo games.鈥�

Then, when you鈥檝e got those specific categories and how much you spent in each of them each month, focus on those categories one at a time and ask yourself, 鈥淗ow much of this is necessary? How much can I trim from this?鈥� Different people will come up with different answers here, but the more you cut without significantly altering your standard of living, the easier it will be to find financial freedom.

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