Do you know your spending profile? If you don’t know your spending profile, probably you haven’t seen funds trickling out. Almost everyone I know who tracked expenses for at least a month found they could change spending habits and reduce monthly outlays—some by more than 20%.
The average American and Canadian household (2.5 people) spend around 50% of income on food, clothing, transport, and shelter. In Canada, each of five income quintiles in the table below represents about 70% on food, clothing, transport, shelter, and taxes. The first four quintiles reflect 67% each on the five expenses’ groups.
Canadian Household Spending Profile
I have three observations to help you get to know your spending profile.
First, I think it is essential, particularly for folks in debt, to track expenses regularly to learn their spending habits. This seems obvious, but many people don’t do it because they “can’t be bothered to do this tedious exercise.” They claim they have no time!
Knowledge of past spending not only helps future decisions, but is important to build and maintain an effective budget.
Learning why you spent on different categories is not the reason to track spending. There are two main reasons. First, monitor spending to understand the process you used to decide to spend. The process is as important as the result. Second, track spending to learn what motivated spending. When you focus on why you spent, you will rationalize, feel guilty, and find the process distressing. Deal with why only after you know where funds went. Then you will see leaky spots and you can start to look at how you decided to spend.
My second observation deals with the spending profile itself. Don’t strive for a particular pattern. Your spending profile will reflect your lifestyle. You might choose to have a modest home but a more expensive car. You might decide to rent a home, take public transport week days, and rent a car on weekends. The key is to live in your income and stay out of debt except for an affordable mortgage. Your spending pattern is unique.
The third observation deals with the items not categorized in the 70%. We must pay close attention to them. That’s where we overspend. We forget amounts spent on cell phone charges, eating out, entertainment, insurance, vacations, personal care expenses, pensions and investments, heath care (around 5% of the average household spending in the USA) and other discretionary items. These areas usually account for 30% and are more elastic and more erratic They explode credit card balances more than the 70% group that in total tend to remain stable.
When you learn where all your funds went, normally, the next question is how you decided specific allocations—-the process you followed before spending. Seeing your spending analysis and understanding your spending decision procedure will show clearly the holes through which money is oozing. Identify them and develop a plan to plug them. You might need help from a financial counsellor or an independent financial advisor to move ahead. Don’t let your pride prevent you from seeking this assistance.
Most of all, if you follow Jesus, you need to ask Him to give you insight and to guide you through this challenge. Let’s remember it’s your behaviour that controls your spending.
Get to know your spending profile. The quintile numbers above are mere results of our choices. By God’s grace, tracking our spending will lead to behavior changes. Then expenses will fall, and ultimately we live a debt free lifestyle that honours Jesus. Still, before you spend, use the Affordability Index.
© 2014, Michel A. Bell