Why Analyze Your Spending?

You know how you spend your money, right? After all, every time some money leaves your account or your pocket, it’s due to a decision you made.

Well, it turns out things aren’t quite that simple. For a number of reasons your grasp of your finances is likely to be a lot less precise than you think. In fact, unless you’ve carefully measured your own spending habits, you probably have quite a misleading idea of where you can save, and what you spend too much on.

This first step is designed to get you a little distance from your spending, so that you can take a new look at what your cash is spent on.

Here are a few examples of cash leaving your account without a conscious decision at the time, or outside your control:

  • Utility bills
  • Magazine subscriptions
  • Auto-renewing insurance policies
  • Interest payments on loans

In addition to these, and in many cases much more dangerous, are amounts spent due to a deeply-ingrained habit. These amounts are very difficult to stop because they feel like hard-earned little luxuries.

In this category you might have little payments to upgrade the quality of a plane or train ticket, snacks eaten outside of mealtimes, instinctive upgrades to more branded produce at the grocery store, cigarettes, regular consumption of alcohol or anything else that auto-renews.

There’s a reason so many businesses today work like subscription models – they know that if they give you the first month or two for free, it looks like a good offer, but then you’ll pay every month and it takes time and effort to then contact them and cancel the membership. Assuming you even can.

An Anecdote

We like to think we understand how we spend money. When you take a close look at how you spend your cash every month, however, surprises tend to occur.

The first time this happened to me, many years ago, I decided to track what I was spending for a fortnight. I got a tiny notepad (that cost way too much), and recorded every single time I spent anything.

For the purposes of the exercise, I decided to try to not use my debit card at all, so that I would have to pay for everything in cash and it would remind me to record what I’d spent.

At the end of the fifteen days, I added up what I’d spent in different places and looked over the numbers. Some were higher than others. Some were more avoidable than others. A few reflected moments when my self-control had slipped.

One number jumped out at me though.

It said, Pret à Manger, which is where I used to get my coffee next to the office. The number was much, much higher than I’d expected. I was spending more on coffee than I was on all my utility bills combined. I had a habit of wandering out to the coffee shop three or four times a day and bringing back a latte to my desk. I’d have one in the morning on my way in too, just to start the day with a little luxury. Sometimes I’d get a pastry to go with the coffee, which I would not have bought if I hadn’t gone for coffee in the first place.

I could literally save enough to go on a decent holiday if I just stopped drinking take-away coffee for three months.

I went through serious coffee withdrawal – in addition to the take-aways I’d also have espresso in the office any my total coffee intake was a staggering 9 cups a day on average. And I hadn’t even noticed! It got so bad I went to see the company nurse to ask if the headaches were normal.

The moral of the story: measure twice, cut once. You may think you know how to reduce your spending but until you measure it carefully, you don’t really know what’s going on there.