Canadian Finance Blog

Personal Finance Basics: Spend Less Than You Make

Posted: 25 Jan 2012 02:00 AM PST

Was one of your new years resolutions to get your finances in order? Are there a few things about the whole situation that you’re just not sure about? Personal finance doesn’t have to be that hard. There’s a couple basic rules that you can follow that will instantly change your whole financial situation. The first, and most important one of those guidelines is to spend less than you make. In fact, this rule is so basic that it doesn’t matter how much money you make, or what your debt situation is like – everyone needs to spend less than they make. It may sound stupidly obvious, and it may seem like you can just move on from this point because you obviously need to spend less than you make in order to improve your financial situation, but it is also how you go about spending less and knowing that you’re spending less that is just as important. So how does one go about doing that? What’s the first step?

Change Nothing – Track Everything

The very first thing you want to do about your financial situation is to not change a thing. Just go about your regular business, spending money when and where you normally would. If you are absolutely desperate, of course, I’m not suggesting going even further into debt. In fact, the absolute best way would be to track backwards if possible, but most people spend cash and don’t keep receipts so it is hard, if not impossible, to figure out where exactly your money went – and that is precisely what we want to do. We want to track where your money is going for two reasons. One, by simply tracking and adding up how much money you are spending, it often results in less money spent. A lot of people don’t realize just how much it can cost to get out two or three times a week, and have better priorities for that money. The only way to change where that money goes is by knowing where it went. So for the next two or three months, track everything. Write it down on a piece of paper, keep track of it on your computer, put all the receipts into a basket, using a webapp like Mint, whatever you need to do. At the end of every month, tally it all up into categories.

Determine Your Income

Figuring out your income can be a lot easier. Some people get a steady paycheque every two weeks, others income can vary from cheque to cheque. Look back through your bank account history, figure out how much you make over each month, and determine the average of the last 6 months. That’s your new goal. That’s the number that you have to meet each and every month, going forward. So now start comparing your income and your expenditures. Do you spend more or less than what you normally make? If you’re spending more, then look back over your categories and find one that you can drop. Does that bring you below your average income? If yes, then stop for now and maintain that spending point for a month or two. If no, then keep going, unless your spending is less than what you made that month.

Start Making Progress

So that’s it. Now that you’re spending less than what you’re making, you can start making a positive impact on your finances. What do you do with the extra cash flow? Well, that’s up to you. Some great options would be to start paying off debt, to start building an emergency fund, or to put money aside for the future. It really is as simple as that.

Personal Finance Basics: Spend Less Than You Make originally appeared on Canadian Finance Blog on January 25, 2012.