How Much Money Do You Spend Per Year?

This is the big question you must answer if you really want to dominate the world of savings and investing. Knowing how much money you are spending is essential to get organized and create an investment plan. So let’s see how you can find out in a simple way.

A FIRST APPROACH TO YOUR EXPENSES

You can start by knowing the amount of your expenses in large numbers, looking at how much money you had at the beginning of the year in your accounts, adding the money you have earned and subtracting the money you currently have. That is the amount you have spent in the last year.

In this way, you can compare it to the money you have earned from your payroll and your jobs. If you earn more than what you spend, you will have saved money and you will be closer to your goal, but if it is negative it is that you have spent more.

With all the online banking available nowadays, it is easy to do this to review your personal finances over several years, see how much you spend and if your expenses are more or less constant. You only need to know the money at the beginning and end of each year and the payroll and income you have had during it. Your tax return can also help you to know your net income for the year.

With these numbers you should know how much you are able to save as a percentage. To start being a good saver, you should be able to save 10% of what you earn (or you can think in terms of spending at least 10% less than you earn). Consider that “big-time” savers are capable of saving more than 50% of what they earn. If that’s not exciting news, what that translates to is the following statement: With each year’s income they can live for at least two years, in addition to what they can earn by investing.

WHAT DO YOU SPEND YOUR MONEY ON

To find out where you have spent your money, you can go one step further and look in those bank statements where you spent different amounts of money. Right now, the mobile applications of the banks separate these expenses into different groups (although these apps or the categories are not 100% accurate, they can give you a general idea).

You don’t have to go to the penny, but you can define several groups of expenses and see the amount in each of them.

When you know exactly where you have spent the money, you can cross-check it with your goals to see if you can reduce expenses from one category to use that income in another group in which you feel the money would be more useful or you can pass it on to your investment plan.

The things you can measure are the things you can control and are easier to change. That’s why I consider this step paramount to being able to pull the reins of your personal finance and your legacy.

Measurement is the first step that leads to control and eventually to improvement. If you can’t measure something, you can’t understand it. If you can’t understand it, you can’t control it. If you can’t control it, you can’t improve it.

H. James Harrington

CONTROL YOUR EXPENSES TO THE MAXIMUM

Getting to the previous point is enough for many, but if you are like me, you can write down each of your expenses (for example in a mobile application) and know exactly where you spend all your money.

In case you’re curious, when I have done this, my groups were:

• Housing (includes rent or mortgage, electricity, water, telephone …)
• Groceries/Supermarket
• Transportation (the trips I make by train, bus, plane, expenses or car rental, gasoline, tolls …)
• Dining (all restaurant expenses or food delivery)
• Fun/Leisure (theater, beers with friends … all within the time outside of travel)
• Courses, books and training (everything related to training and expenses of my business endeavors)
• Travel (I like to know separately what I spend when I go on trips locally or abroad)
• Others (for extraordinary expenses that do not fit in other sections)

In this way, I could see at a glance at the end of the year the percentage of money that I had spent in each section.

You can make the groups that suit you best, for example make a section if you have children, health insurance, gym, etc. Each person gives importance to the groups of expenses in a different way and maybe as you write down, you will change those groups. It is normal, so do not worry, the important thing is that you start doing it.

Think about which groups you spend the most money on and start writing them down.

START DEFINING YOUR PLAN

The moment when you know what you spend is the moment when you can define your plan and thus start saving and investing with a purpose and in an organized way. As I have told you, you do not have to go to the third step, simply knowing in general terms how much you spend and how those expenses evolve (if they are maintained, grow or decrease) is enough to be able to organize yourself.

For example, due to my way of life, my expenses are more or less constant every year, and the difference is only in the courses I take, leisure and the vacations I take. The rest, each year is very similar, which allows me to make an automated saving method and from there, make investments every month with the plan that I have defined.

Now tell me, do you know how much money you spend per year? Do you have control over what you spend it on? Do you have an automated savings plan knowing what you have left over?