Before you can figure out how you can save money, you must know where you are spending your money.
Start a money journal. Have you ever kept a food diary to help you lose weight? You write down everything you eat so you can see how many calories you are consuming. This really works. In the beginning you get some nasty surprises: that handful of cashews was as many calories as your entire breakfast! The important thing is that now you know where to cut. It’s the same thing with starting a budget. You need to keep a detailed record of your spending so you can figure out where to trim the fat.
The best and easiest way to do this is to use your phone, PDA or a simple notebook. Every time you spend money, no matter how small, jot it down. You’ll be amazed at how much you’ll save by cutting out things you probably won’t even miss.
The next step is to divide all your expenses into different categories; some mobile phone apps will do this for you. But, if you are low-tech, you might want to make each page of your notebook a different category: rent, food, clothing, phone, auto, entertainment, etc. There are no set rules for dividing things into categories. For example, it’s up to you whether dining out goes under food or entertainment. Just be consistent.
Now go through and see where you can cut back. Take the money that you’re not spending on movies or vending machines and either pay off your debts or put it into a savings account. It’s always a bright idea to have a cash reserve for a rainy day.
How do you compare to your peers?
Some online budgeting programs can automatically compare your spending patterns with others in your demographic. It’s interesting to see if you are spending less or more than your peers on things like food and clothing. If you are spending much more, maybe you can cut back.
According to the Next Great Thing’s Global Youth Panel, young adults in the U.S. spend 52% of their money on clothing, 22% on food, and 13% on music. In the U.K. they spend 30% on going out, 15% on clothes, and 10% on phones and phone bills. Hong Kong young adults also spend more on clothing, 40% on clothes, 28% on food, and 12% on cars and transportation. In the U.S., men typically like to spend money on food and restaurants. Women spend more on shopping. In fact, 40% of women spend a majority of money on clothes compared to 12% of men.
Of course as these people graduate college and/or move out of their parent’s homes these statistics will change. Rent and bills will eat up most of their money.
So why is it important to compare your spending with others? For one, it’s interesting. I always wonder how my habits differ from my friends. But, more importantly, it you are spending much more than the average on something you should examine that. Many people try to keep up with their friends: buying designer clothes, fancy cars, and dining at expensive restaurants. But maybe they truly aren’t in your demographic—maybe they make much more money than you.
Next week: We’ll look at how you can do some spring cleaning and start saving.