Joe Biden: “Don’t tell me what you value, show me your budget and I’ll tell you what you value.”
If I asked you how much you spend on food, clothes or utilities every month, would you know? And if you did, would you know what percentage of your monthly income goes towards each? More importantly would you know if that was typical or normal for what others your age and income profile spend?
A question I’m often asked is, how do I/we compare against others?
Fortunately, I have enough data from existing clients, which I can use to benchmark the percentage of their outgoings against others of a similar profile, and it identifies what categories they over or underspend on.
I find one of the more motivating factors, which triggers people into making changes to their spending or savings habits, is knowing what their peers do. There is nothing better to force someone into taking action, than when they find out someone similar to them is saving more or spending less than they are.
It’s very difficult to know whether you are spending too much or too little than is considered normal if you don’t track your spending. If you don’t know what you are up against, it’s hard to know what changes need to be made. Often your perception of your spending and the reality could be poles apart. This is why it’s important to know how much you are spending in different categories and also to have guidelines to work within.
I encountered an individual earlier this year, and she was at pains to point out how planning for her children’s future education was a top priority for her. That was good to hear, but when I delved a little deeper to see what she was spending her money on, it told a different story. From reviewing her monthly outgoings, it showed she was spending 8% of her monthly income on clothes but only saving 3% of it for her two children, which didn’t seem right.
Surely, being able to financially support her children in the future if they chose to go to college was more important than clothes? Of course, it was.
But if we didn’t carry out that monthly budgeting exercise for this woman, which showed her actions weren’t congruent with what she said her priorities and values were, she would never have known and wouldn’t have made the necessary changes. Clothes obviously were not more important to her than her children’s future, and after discovering this, at first, she was embarrassed, then became angry at herself, and then became determined to make the adjustments required.
I come across people like this woman all the time, who confidently and proudly tell me what’s most important to them (they want to become debt free, retire early, financially protect their family, advance their career etc.) but unfortunately a large percentage of them are just all talk, because their spending and savings habits tell a different story.
Former US vice president Joe Biden once said, “Don’t tell me what you value, show me your budget and I’ll tell you what you value.”
Your goal should be to spend money on things that are important, and cut back on those that are not.
Recording how you spend your money each month is one of the most important areas of personal finance management - though it’s time-consuming, so having the right tools at your disposal is important.
I devised a very simple budgeting tool which gives clients those insights and visibility at the click of a button.
But, regardless of what tool you choose to record your monthly outgoings, you need to know how much of your income, it’s acceptable to spend each month on different things. The answer will depend on your own circumstances, but I am going to give you some guidelines next week that might help.
Whether we like the fact or not, money can often be the thing to help us achieve the things we value.
When people know what those reasons are, and figure out what they value most, they begin to manage their money in a much better way. It becomes easy for them to work harder, longer, smarter.
It’s the reason they work on making themselves more valuable to existing and future employers, and begin to apportion more of their income towards personal development than they do towards sandwiches or coffees.
The key to achieving financial success, whatever that means to you, is spending money in line with your values, because if you do, you will avoid the trap of spending money on things that mean nothing for you.
In next week’s article, I am going to give you what I believe are the percentages of your income, you should be spending each month on different categories. And in advance of that, it would be a great exercise, if during the next few days, you thought about two things.
The first is thinking about what’s important to you and what you value most? And the second is figuring out, how much you spend each month on areas like food, transportation, clothes, utilities, food, debt, savings, entertainment, insurances, mortgage, health and fitness, family expenses, education, clothes and annual holidays.
And when you do, you can then compare your numbers against what I recommend, and see if you are over or under in the various categories.
And whether you care or not, what I recommend, completing this exercise will be a very worthwhile exercise, and will confirm whether your spending habits, are in line with what you value most.
Liam Croke is MD of Harmonics Financial Ltd,
based in Plassey. He can be contacted at firstname.lastname@example.org or www.harmonics.ie