The foundation of any budget that WORKS is a ‘Spending Analysis.’
A Spending Analysis (or financial analysis), is a snapshot of your cashflow over a specific period of time. A spending analysis is like a Polaroid – it takes some time to develop and maybe a shake or two before the picture really comes into focus.
Most financial experts agree that three to six months worth of data is enough to give you an accurate picture of your average spending habits. When we talk budgets with our clients, this is always our starting point. And nobody likes it. Nobody wants to come face to face with the cold hard facts: we overspend, we live beyond our means, and we do stupid things with other people’s money (credit). I’m not going to sugar-coat this:
THIS EXERCISE IS NOT FUN!
People take one look at their Snapshot and realize that their finances are hideous. They’re poorly lit. They’re out of focus. And no amount of Photoshopping (aka DENIAL) can fix it.
Don’t overthink this. Just get started!
Pull out your bank and credit card statements from the past six months. It’s the 21st century, people. You can access all your credit and bank statements from that thing called ‘the internet.’ Print them out.
Once you have gathered 3-6 months-worth of records, it’s time to start doing the math.
Work your way through every statement and add up each expense in its appropriate category (Groceries, Clothes, Coffee, Booze, Gas, Toys for the Kids etc.). In addition to patience and perseverance, the key to this exercise is honesty. You need to be totally upfront with yourself about your spending habits – even if you don’t like what you find. Sure…you could fudge the numbers or ignore December’s gift-giving rampage, but in reality, you’re just deluding yourself. DON’T WASTE YOUR TIME!
Once you’ve gone through all your statements and added everything up, divide the total in each category by 6 (or by however many months you’ve worked with). This new total is your average monthly spending.
But this step is key to helping you figure out where you can scale back and begin to set realistic parameters on your personal spending…you’re now ready to set up a realistic budget!