Do You Really Know How Much Is In Your Checking Account Right Now?
October 24, 2012I guess it’s no mystery who is responsible for keeping track of where the money goes in my household. As a financial planner, you might call it an occupational hazard, but what frustrates me the most is that I’m not the one that is regularly spending the money. Susan is primarily responsible for clothes, groceries, and other household expenditures that are required to maintain a household of six.
Every once in a while, I like to tease Susan by asking her how much she has in her checking account. More often than not, she admits that she really is not sure. It’s not that I’m trying to catch her or put her on the spot…okay, I’m lying. I AM trying to catch her, but you can probably see why. It’s not her fault. She is extremely busy, and when she’s making five, six, seven or more financial transactions in a day, it’s easy to lose track—and that’s exactly what we need to do to overcome “financial inertia.”
Last week, we looked at how to make this financial inertia work for us by automating savings habits. This week, I will focus on point #3 from Miranda Marquit’s blog post on the subject of overcoming financial inertia: tracking your money.
Find a method that works
If Susan, or anyone, is going to know how much they have in their account, they need to be able to track money going in and money going out. There are a number of ways to do this, but the most important thing is to find a way that works and to stick with it.
For Susan, she prefers to write things down. It may be a little tedious, but using something as traditional as a pencil & paper is an easy way to see where the money goes. If you prefer this method, it helps to use an expense tracker like this one as a guide. For those of us that prefer something electronic, using an Excel spreadsheet or an online tool such as mint.com or yodlee.com may do the trick.
Review the results
Tracking expenses is all well and good, but remember, our goal is to overcome financial inertia. The key to getting out of the rut is to find motivation, so let’s look at these expenses a little closer.
As you add up the amount you spend every month on things like dining out, entertainment, and other non-essential expenses, ask yourself how much you could save by cutting back. Is it a dollar a day or a few dollars a day? Consider what that few dollars a day could be worth if saved for the next five, ten, or twenty years. For example, if I saved $5 a day by packing my lunch, in five years I’d have about $9,000 in an emergency fund. In twenty years, I could have about $70,000 (at a 6% rate of return) in my retirement fund.
Review your spending habits and look for ways to lower your expenses at sites like lowermybills.com or feedthepig.org. Find your motivation by using a Daily Savings Calculator to see how much that savings might be worth over time.
Use what you learn to create a plan
Now that you have your motivation to make a change, create a plan of attack. Start by mapping out a spending plan using one of the money management tools listed above, or if you prefer the pencil & paper method, check out this Easy Spending Plan. Don’t forget to include non-monthly expenses and saving for goals. To improve the chances of success, remember to put as many things on autopilot as you can, including paying bills and putting money away for a rainy day.
One of these days I’ll ask Susan how much is in her checking account and she will know exactly how much is in there. When that day comes, I’ll know that she has overcome one of the greatest hurdles that holds many of us back—financial inertia.