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(In 2014, my husband and I decided to make a significant change to our way of life: we dropped from a double-income household to a single income. You can read about this decision here. This post is part of my Living simply series.)

So here’s how we were able to reduce our spending to the point where one of us could quit working temporarily. (Going on two years now.)

The goal here is simply to spend less than you earn. Considerably less, if you can. In order to determine if you’re doing that, or if you’re even able  do that, you need to know exactly how much you earn (you can usually figure that out by looking at last year’s income tax forms, assuming your situation hasn’t changed) and compare that to exactly how much you spend. This part’s a little tougher for most people. But if you don’t know how much money you’re spending, and on what, you won’t know how to modify your habits to cut back.

This means keeping detailed accounts of how your money is spent. It may sound daunting, but it’s essential. We have a spreadsheet where we enter what we spend every month into various categories. Mr. Money Mustache has a great example here, and ours is broken into nearly identical categories.

And yes, this means saving your receipts for every. Single. Thing. You. Buy. It may sound tedious and odious and boring as all get out, but tracking your spending really is essential to this process. One way to simplify this could be to buy everything on credit card. That way you’ve got all your expenses on one or two bills, with a few receipts for cash or debit transactions. However, I am very hesitant to encourage credit card spending, because most Canadians already seem to be addicted to these little plastic monsters.

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Get counting those beans!                                                 (Photo: FreeImages.com/Alexandre Jaeger Vendruscolo)

(This is probably the most important financial rule in our household: NEVER buy something on credit card if you can’t afford to pay the card off in full by the next payment due date. Never, ever, ever pay interest on a credit card. If you can’t afford to pay off your card by the end of the month, then you can’t afford the item you want to buy. Period. We also don’t have a line of credit and never pay with debit. But this is a more advanced stage of the process. Let’s get back to the early steps.)

How long do you need to do this tracking? We’ve never stopped. It’s still how we determine what we spend in a given month, and how we set our budget for the next year. But for starters, it’s a good idea to collect your data for about three months, then look at the data you’ve collected and see where you could make some strategic cuts.

Did you spend $500 or more on clothes and shoes in three months? Unless you’ve got kids, this is probably unnecessary spending. Especially when you know you’ve got some perfectly good clothes tucked away in the back of the closet that you haven’t worn in ages. Slash the clothes budget, and get creative with what you’ve got.

Or maybe you spent $500 on take-out meals and restaurants. What usually happens here is we run out of time or energy to make meals at home, so we splurge on take-out. In our house, the limit is one meal per week can come from outside the home. Otherwise, everything is home-cooked. The trick here is planning in advance, and making large batches of things that can be frozen for later.

Much like losing weight, you can approach this process in two ways: you can diet, that is starve yourself and exercise like crazy for a few weeks, for results that will last only a few weeks or days; or you can change your entire mindset towards food (and money), and make your changes permanent.

In brief, here are the first steps towards financial freedom*:

  1. Track your spending meticulously.
  2. Look at the categories where your spending is superfluous and identify ways to cut back.
  3. Set concrete goals. For example: Let’s cut our restaurant budget in half over the next three months. Let’s not buy any electronics (tablets, phones, TVs) for one year.

*When I talk about financial freedom, I don’t mean those TV ads that show people on a tropical island, sipping fruity drinks because they invested wisely and now they’re rich. I mean freedom from having to trade most of your waking hours for money. Rich in time, which is more valuable.

In later posts, I’ll talk more about where to make cuts in your expenses, and what to do with some of that extra “disposable income” once you’ve got yourself spending less than you earn.

So get counting those beans!

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Are you excited about becoming more financially free, but you don’t want to wait a few months to gather data before getting started? Looking to make a big dent in your household expenses right now? Cancel your cable. Today.

It blows my mind how much cable companies charge for crappy television. I haven’t had cable in nearly 10 years, but that’s not to say I don’t watch television. You can get loads and loads of DVDs from your local library, both movies and TV shows, for free. Yes, that means waiting until the whole season comes out on DVD, so you’ll be a bit behind on the storylines compared to people with cable. It’s a small price to pay for saving $100+ per month. You can also ask a friend with cable if you can watch the show together, turning it into an inexpensive social event. A lot cheaper than a night at the bar, or the movies.

 

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