Topic: Time To Review and Categorize Your Expenses.
Why This Topic For You Today? Is it time to review and categorize your expenses? As we look to the weeks and months ahead, for many people it is unknowable how their income and lifestyle may be impacted by the Covid-19 virus. Until such time as a vaccine is created and widely adopted, our day to day lives may be quite different. When will the case count begin to peak and when will things start to get back to normal? Will there be a “new normal”? Will your income be similar in the future as it was in the past? If your income is in question, is it time to review your expenses?
Due to this uncertainty, it may be better to make gradual changes over time to your expenses rather than delay decisions, potentially accumulate more debt and then being in a worse financial position in the future. You definitely want to proactively review and categorize your expenses today and begin to make small decisions over time as things evolve. This approach may put you into a position of strength in the weeks and months ahead.
Road To Mastery Strategy: To solve or address any complex problem, the first step is to break it down into smaller pieces. When it comes to reviewing and categorizing your expenses, consider the following categories:
- Your Basic Income Needs: Your basic income needs are your every day living expenses that relate to your home (such as your mortgage, utilities, insurance and taxes) vehicles, transportation costs, car payments, auto insurance, phone, internet, cable and groceries.
- Your Lifestyle Wants: Your lifestyle wants include your entertainment expenses, memberships, hobbies, activities, dining out, travel and vacation properties.
- Your Family Expenses: Your family costs will be things such as child care costs, children’s school and activities and supporting an aging parent.
- Your Debts: what payments are made each month to cover your other debts? Do you have credit card debt or a line of credit?
- Your Financial Security: Finally, what dollar amounts are you allocating to insurance, RRSP’s, TFSA’s, RESP’s or other savings?
Once you see your expense amounts in each category, what jumps out to you? How do the numbers compare? Are you surprised with the amount of money being spent in one area vs. another? Are your expenses in alignment with your values at this time? If so, highlight these areas and look for ways in which you can reduce these expenses.
There are three really important points I want you to take away from this simple exercise:
- The key to managing through a period of significant change is to have great clarity on where you are today: what are you spending in each of these categories?
- Something is only as good as to what you compare it to: by comparing the amount of money you spend in each area, you can begin to determine where some expenses should be reduced while others should be increased. Perhaps changes need to be made out of necessity or perhaps you wish to make changes so that your spending is in more alignment with your values values.
- Now you can begin to create a plan going forward. If you know where you are today, and if your income were to not fully recover in the months or years ahead, what changes to your spending would you make at that time? Now’s the time to be planning ahead.
Summary: The key to reviewing and categorizing your expenses is to have great clarity on how you have been spending your money in the past so that you can then make adjustments going forward. Do this exercise at least once a year to make sure you are always aware of your spending. This will help you quickly adapt to changing circumstances over time. At this time of uncertainty, you may wish to track your expenses in detail each month.
About Us: Nelson Financial Consultants is an independent financial services boutique. Nelson Financial Planning Corp. provides fee only financial planning services. We can assist you by building a custom financial plan that considers multiple scenarios designed to pay less tax, take less risk, reduce fees and expenses while retaining more income and building more wealth.