This is a guest post from Dr. Tony Pennells. Dr. Tony is the co-founder of MindShift.money and the best-selling author of three books on personal and business finances. Having achieved Financial Freedom at 27, Dr. Tony believes that through Financially Fit Bootcamp and Cash Flow Cure everyone can get there. He has made it his life’s mission to help others live a life where their money works for them—not the other way around.
You know that to build Freedom, you need to create a Cash Surplus. It’s simple math. For money to go toward building your Freedom Generator, you need more cash coming in than going out. And calculating monthly expenses is the first step to creating that Cash Surplus. But are you calculating correctly?
Most of us typically have a good sense of what our income is. We get a paycheck, statements from interest-bearing accounts and government forms on annual earnings. But when it comes to expenses, a lot of people just guess… and they tend to underestimate. By a LOT.
So how can you be certain you’re Living Within Your Means? How can you confidently state what your monthly expenses actually are? The key is to avoid these four common, Freedom-killing mistakes:
Money Mistake #1: You’re forgetting that not all expenses show up on a monthly bill.
Ever tried to make a list of everyone you pay in a month? Remembering the bills that show up every 30 days in your mailbox or inbox isn’t too hard. So you jot down your mortgage payment, your electricity bill and your phone bill.
But, if you’re computing expenses simply by summing each of your monthly bills, you’re probably underestimating your true expense figure by 50% or more.
What about the payments you make each month—or even several times a month—that don’t come on a handy statement? Consider your grocery store run, your trips to the gas pump, your weekly splurge at happy hour and more. All of these frequent costs need to appear in your monthly expense tally.
Money Mistake #2: You’re assuming that each month is like last month.
Okay, so you dug deeper and pulled up not just your utility bills but all your receipts and credit card purchases from the last month. Add it up, and you’ve completed the calculating monthly expenses task… right?
Well, only if you want to look at a single data point. To get a true feel for what an “average” month looks like, you really need to go back a whole year and size up 12 full months of your spending.
After all, your last month of spending could be average, or maybe you spent far less (or more) than what you do in a “typical” month.
Money Mistake #3: You’re not considering expenses that only come around once or twice a year.
Some of your regular expenses don’t roll around every single month. Maybe you…
Take a vacation each summer;
Pay your car insurance premiums every 6 months;
Shell out for child care or tuition costs only during the school year; or
Pay quarterly taxes.
While you don’t pay these bills per se on a monthly basis, they are regularly occurring costs that you incur. And they must figure into calculating monthly expenses.
If you want to see how each of these expenses figures into your monthly total, average out the payment you make across each month. In other words, just divide your annual vacation costs by 12 to get your monthly contribution to that bill.
Money Mistake #4: You’re neglecting your infrequent but predictable expenses.
Finally, there are those anticipatable expenses that don’t come around on a particular schedule. Certainly, there are unexpected bills like a surprise hospital visit—that’s why you have a Security Buffer—but not all future expenses are a surprise!
Think about your car. You know you’ll need to invest in wiper blades, oil changes, tire rotations, car washes and mileage-specific check-ups throughout the year.
And what about clothing your family? It’s a safe bet that just about everyone in your clan will need to replace last year’s worn sneakers.
The best way to catch these sneaky, significant costs? Again, go back over a whole year’s worth of your expenses. If you pay mostly with plastic or you already track your expenses, this process is pretty straightforward.
If you don’t keep track, and you shell out a lot of cash, start building up a record now. Use some software, an app or just a pencil and paper.
The Money Planner worksheet in Module One of Financially Fit Bootcamp is an excellent tool for getting a clear sense of what your monthly expenses really are. And, once you know that all-important number, you’ve taken one of your First Steps To Financial Freedom!