3 Steps to Learn How Much You’re Currently Spending vs Saving

As we think about wealth building, we can all agree it’s a good practice. But how do we actually make habit changes and allocate more funds to a savings account? A great place to start is to look at your current spending habits and make changes from there. For many, looking at where your money goes (your outflows) is an incredibly eye-opening experience and one that might have you make habit changes just based on the exercise itself.

Here are some simple steps which include some useful tools on how to learn how much you’re spending and how to challenge your habits.

First, look at:

Baseline spend

Ask yourself:

• How much do we spend on our house, credit cards, childcare, taxes (see link below)
• What will change in the near future that reduces spend? (eg kids starting kindergarten, no more commuting, etc)
• Is there anything we are going to need to start paying for in the near future (e.g. childcare, education, etc?)

Bucketing your income

After looking at your bank and credit card statements, bucket your expenses into the following:

• Necessity expenses — Utilities, rent/mortgage, school, food
• Discretionary expenses — Vacation, etc (note here that if you are working hard you may increase this to facilitate your life eg home meal kits or outsourcing cleaning and laundry)
• Building Wealth — What are you currently saving

Challenging the buckets

• Is there anything in your list of expenses that you outlined above that you could live without?
• As an exercise, what would have to change for you to reduce your discretionary expenses by 50%? 25%? 10%? This is just to understand your limits of how much you’re willing to change from your current lifestyle eg changing from expensive grocery deliveries to cheaper store yourself, cutting down on takeout, reducing entertainment subscriptions (Netflix, HBO etc), traveling less, living in a different city/house/apartment, driving fewer vehicles
• If you want to save more — retire early, make a big purchase, etc — what expenses could you play with?

A quick read about savings and how to think about it located here. In this article you will learn that a general rule of thumb is 20/30/50 – 20% of your income should go to savings, 30% to discretionary items and 50% to necessities/fixed expenses (like housing and food). Ask yourself:

• If we want to retire early, how much more money (above the 20% rule) would we be willing to set aside?
• What are the bigger items that we may need or want to spend on in the future (college for our kids, an addition on the house, etc)?
• Are there things in the discretionary bucket that we could shift to savings?
• Do you see yourself taking a sabbatical (on that later) and need to budget in a few months of salary?

We recommend starting with an online tool such as this which can quickly help you calculate your expenses vs your income in a dynamic way.