The Key to Managing Money is Knowing How to Spot Those Hidden Monthly Expenses in Your Budget
Managing money is the middle ground between making money and saving money. Once the money is made you have to figure out what to do with it. This “figuring out” part is where things can get murky for a lot of people.
If managing money were a bridge between income and savings, let’s just say that many people aren’t making it to the other side of the road. Aside from not having enough money, which is an understandable gripe nowadays, a lot of people simply don’t know where all their money goes, once it is earned.
For higher earners, this is where accountants and financial advisors step in. For average earners or even above-average earners, whom are solely responsible and take the reins over their personal finances, there can sometimes be a sense of overwhelm when it comes to being in control.
I was quite surprised to discover that although some of the most popular internet search queries include some variation of “budgeting” when it comes to managing money searches, budgeting, in and of itself as a concept, is something that most people resist.
So even though many people are aware that they need a workable budget and seek out ways to apply it to their personal finances, most of them do not follow through with sticking to it.
Something very interesting of note is that many people ditch their budgets for some of the same reasons that people ditch diets. Lack of discipline, aversion to following strict rules, and likening one mistake to complete failure are a few common threads.
The thing about diets is that the process can be grueling but everybody loves the results when and if they have been successful at sticking it out. Well, the same logic can be applied to sticking to a budget.
Budgeting isn’t brain surgery. In its most simplistic form, a person needs to know three things to be good at budgeting money: net income, total monthly expenses, and extra money. Those are the basic building blocks to successful budgeting.
Budgeting is a major building block of managing money, effectively. Let’s delve into these building blocks and I will tell you why you should track every single purchase that you make for an entire month.
Net Income
Net income is your gross income minus taxes (federal, state, etc.) and deductions (medical, retirement, etc.) Plainly speaking, it is your actual take home pay. This is the amount you always start with when you are creating a budget.
Total Monthly Expenses
Your monthly expenses are not just your bills but EVERYTHING you spend money on throughout the month. (Later, I will explain how this is where I, like most people, flubbed up budgeting in the beginning.)
Housing, utilities, transportation, insurance, groceries, etc. are a few of the main areas most people know to account for. But entertainment, dining out, buying daily coffee/breakfast/lunch, clothing and accessories, and subscription services, are those areas that can easily add up and siphon your income.
These are the hidden monthly expenses that can totally deplete any extra money that may have been left over after paying your primary bills.
Extra Money
Extra money is what’s left after your total monthly expenses are subtracted from net income. This can be tricky when budgeting. Many people automatically assign those hidden monthly expenses to the extra money category and before you know it, they are saying to themselves, “Where did all my money go?”
Down post, I will explain why extra money should be synonymous with savings and why this simplifies the process of budgeting.
Tracking Expenses, the Right Way
Even though I held down a job throughout my college years, I never really had a proper budget. I did, however, keep track of my spending and was pretty responsible with money as a student.
I became really serious about budgeting after getting my first permanent, full-time job after college. Aside from what I learned from my studies (my minor was in business, which included course work in finance, accounting, and economics) my research on how to effectively budget suggested that I write down every single thing that I spend money on for an entire month.
$3 for a slice of pizza… write it down. $10 at the laundromat (couldn’t afford a washer and dryer just starting out) … write it down. Of course, I collected paper receipts for every transaction when it was available.
Simply referring to my debit transactions wasn’t always reliable when I was paying cash for small purchases, here and there.
But the importance of writing down every transaction, or keeping a ledger, if you will, was an exercise in being mindful of every purchase in a way that I might not be if I were not tracking with intention.
At the end of the first 30 days (yes, I stuck with it!) I pulled out my receipts, notebook with my written entries, and had my debit transactions on my computer screen.
Starting with my net income, I began to subtract every bill payment, purchase, and all those other miscellaneous amounts that I had been diligently tracking. I was surprised at how all those “other miscellaneous amounts” added up.
Initially, before I started to track for those 30 days, I made a projection of what I thought my monthly expenses and spending would be, along with the extra money.
Boy, was I off! It was all of those small purchases, here and there, that totally threw off my projected budget amounts. In reality, my total monthly expenses were more and extra money was less than my original guesstimate.
The Budgeting Shift
It took some time for me to get the hang of budgeting, the right way. I had a flawed way of thinking about where those hidden expenses should go in my budget. So, I just continued to subtract them from the extra money category.
The problem with this was that I wasn’t saving much money. With that initial projected budget, I had a set amount that I intended to save each month. At best, I had saved half of that amount some months and at worse, I had saved zilch, other months.
I had to make a shift in my thinking. Extra money is not a reserve for all those pesky, little, accumulating purchases to overflow into. Extra money is savings. Period.
I had studied the money rules and I knew that I had to pay myself first. This required some shuffling… of the numbers and my financial priorities. Yes, I was just starting out and money was tight.
I had been reasoning with myself that I deserve to treat myself, here and there, because I work hard and for the most part I was doing the right things with my hard-earned money. I was following the formula, for goodness’ sake!
The first shift was to immediately deduct a set amount for savings after every paycheck. This was a non-negotiable amount that could not and would not be used to cover those hidden, little expenses.
And this amount went directly into my savings account before I paid any bills. Before, my first inclination had been to secure rent payments, then all of my other bills, then everything else, in that order.
Whatever was left was extra money and then I would think about savings as an afterthought. My new approach to budgeting was a total reversal in how I had previously set about it.
The other major shift was in getting a handle on those hidden costs that were eating away at my extra money. It wasn’t that I was haphazardly overspending, it was that I wasn’t properly accounting for those miscellaneous purchases in my budget.
All that tracking I had done beforehand now provided an overview of approximately how much I had spent on those miscellaneous purchases. Although those purchases were not always consistent from month to month, it gave me a good aggregate number to use monthly for discretionary spending.
From that point going forward, I knew to set aside a specific amount for that particular type of spending in my budget. Savings took priority over discretionary spending. I knew to pace myself when it came to the incidental expenses.
This meant that I had to continue to closely track my spending and if I had reached the limit of the discretionary category in my budget then I knew to hold off on purchasing anything else that was not a necessity until the next month. I would not be dipping into savings unless there was an emergency.
So, in addition to savings, my total monthly expenses were broken down something like this:
- Rent
- Utilities
- Groceries
- Transportation
- Entertainment
- Discretionary
There were a few more categories but that should give you an idea of how I was categorizing. To simplify this further, my budget shaped up in this way:
- Net income (after taxes, health insurance premiums, etc.)
- Total monthly expenses now included a discretionary category for miscellaneous spending
- Extra money was initially and automatically converted into savings
This calculation became the foundation of my budget:
Net income − savings − total monthly expenses = balanced budget.
Isn’t There an App for This?
Fast forward to the present where technology has overtaken some traditions, there are certainly apps available to automate the tracking that is crucial to getting a more accurate picture of your monthly expenses.
Tracking is still advisable for at least a 30-day period. Now, there are apps available to do this so that you don’t have to rely on the old school methods. These apps can even assign purchases to a category so that budgeting will be more streamlined if you are techie and want to go this route.
There are also budgeting apps and spreadsheets that will take things a step further for you. The key here is that you must be proactive with these technologies.
The software can do a lot but it is you who must apply the necessary due diligence for following a budget that helps put you in total control when it comes to managing your finances.
I, personally, still utilize many of the traditional methods when it comes to tracking and budgeting. Apps are awesome but I just kind of stick to what works for me without reinventing the wheel, per se.
I tend to find a happy medium between technology and tradition. Whatever methodology you choose, I wish nothing but better budgeting for you!
