When Sir Francis Bacon published the words ‘knowledge is power’ in 1597 he may not have been thinking about people looking at their finances on their smartphones almost 500 years later, but it still rings true.
One of the first steps in managing your money effectively is understanding the way you’re spending. This can help you make informed decisions about your budget, as well as repay any debts and build savings faster.
Categorisation is key
Broadly, your spending can be placed in either of two categories:
- Needs (non-discretionary) – rent, mortgage and other debt repayments, food, utilities etc
- Wants (discretionary) – eating out, travel, new clothes etc
When making spending decisions it’s a good idea to keep these categories in mind. Accounting for your needs before wants can be a way to start cutting back your spending.
It can also be helpful to narrow down your spending a bit more. It’s up to you how you categorise, but these may be helpful ideas:
- Going out
Total up your spending
Looking back over your statements for the last three months, total the amount you’ve spent in each of the categories. You can then divide this amount by three to give you an idea of how much you’re spending in each category on average a month.
Tip: Try to factor in any irregular costs that may not have occurred within that three months, such as TV licence renewal or car tax and insurance.
Consider where you make changes
Are you comfortable with these average amounts? Are you spending too much on the weekend and having to scrimp during the week? Could you be saving more if you cut back in certain areas?
You may find that cutting back on some things is easier than others. For example, it will likely be easier to spend less at the supermarket than reduce your rent or mortgage. But that doesn’t mean you can’t make plans to reduce some of your larger costs over time if you feel you need to.