The only way people are able to make effective and lasting change in their financial life is by first gaining a clear understanding of their starting point—in other words, where their finances currently stand. The way to do that is to start with the facts.
Once you first get clear about where you spend money—and then determine what is really important in your life—you will be able to find the money to accomplish what you want.
Most of us do not take the first step, taking the time to understand how much money we spend and what we spend it on. In fact, we often are afraid to see where our money really goes. We fear that there is not enough to make ends meet, not enough to ensure our security, and so we are hesitant to look.
I have seen many of my clients experience a dramatic and positive shift in their financial situation simply by going through the structured process of understanding how their money is currently being spent, and then incorporating their goals into a viable plan, a Personal Spending Plan.
You might discover, much to your surprise, that you already have enough money in your life to accomplish many of your goals and live a satisfied life.
Many people have tried their hand at budgeting and have found one thing: Budgets don’t work. Budgets don’t work for the same reason that diets don’t work. They address the wrong problem. Diets focus on deprivation, and for most people, budgets do, too.
There is another reason budgets don’t work. Most people simply don’t write everything down. They write down the expenses they know off the top of their head: their mortgage or rent, their car payment, insurance, and utilities—the well-known recurring bills. Maybe they put in food, but they leave off everything that is more discretionary—their pet bills, haircuts, books, and magazines. They don’t include parking and coffee breaks and eating out.
Typically, a person will say, “Well, I make $4,000 per month and my budget says I spend $2,500. So how come I never get ahead? How come I always end the month with more debt on my credit card?”
Thus begins the recurring monthly mystery: Where does it all go? It doesn’t make sense. The reason it doesn’t make sense is that most people don’t base how much they spend on facts. It’s amazing, however, the change in behavior that occurs automatically when people see the facts before them.
Mike and Roslyn came to see me because they were spending more than they were making. When I asked them where they spent their money, they were unable to tell me. Their home situation was typical—Roslyn stayed home with the kids, planned the meals, and took care of most household matters. Mike worked long hours as the family breadwinner.
We went through the exercise of reviewing and writing down everything they spent on a monthly basis. It became clear during this exercise that there were certain things Mike had been nagging Roslyn about for years that had never changed. When we came to the line item for groceries, I could see him rubbing his palms together in expectation. He couldn’t wait to get into this one.
Before we could get very far, he blurted out, “She spends way too much on groceries. I have been telling her that for years.”
“Well, you don’t understand,” she retorted. “You just don’t know what it takes to feed everybody. You just don’t know what it costs!”
Mike turned to me. “Ask her how often she goes to the grocery store!”
I looked at Roslyn questioningly.
“Oh, I go every day,” she responded, as though everybody did that.
“Ask her where she goes,” Mike continued.
I played along, once more looking over my glasses at Roslyn.
“Well . . . the corner convenience store,” she said.
“You go to the corner convenience store every day to buy your family’s groceries?” I asked.
“Oh, yeah,” she said. “It’s right down the block. It’s so handy.”
“Okay,” I asked her, “How much do you spend on groceries?”
She said, “Oh, I don’t know. It’s expensive for a family of four.”
We went through her checkbook for the last three months and add up the money spent on groceries. It came to $750 per month. For a husband, wife, a three-year-old and a five-year-old, it seemed like a lot of money.
Roslyn stared at the number before her on the desk. Then she looked me in the eye and said, “Okay, that’s it.”
Roslyn committed to meal planning and to go to the grocery store no more than twice a week. “And no more buying groceries at the corner store,” she said.
No one had to say a word to bring about this transformation. Her husband had been nagging her for fourteen years, and it had not done a thing to alter the situation. He had been trying to tell her what to do and how to run the household, but he had not helped her to see the facts clearly. His approach had been based on the premise that she was wrong, and her reaction had always been, “Well, thank you very much, but until you stay home and take care of the children, and make all the meals—get out of my domain. It is none of your business.”
In my office, she changed her attitude on the spot, and it happened for one reason only: she took the facts into account. When she saw how much money she was really spending, she made the decision to change her behavior.
The beauty of financial planning is that the facts will always show you what direction to take. When Roslyn saw the $750 on a piece of paper in front of her—that was it. She decided to spend less money on groceries.
Three months later, Mike and Roslyn came back in for a review. Roslyn had reduced the family’s grocery bill to $450 a month!
Like Roslyn, you might think you are spending $150 a month on something when you are actually spending $300. Clients will swear that they spend a certain amount on something, but when they gather the facts, they are usually spending more. Until you gather the facts, you will be delusional about how much money you are actually spending.