Dreamworker has a lifetime of successful business, relationship, career and financial experiences she enjoys sharing with her readers.
Most people are unrealistic about the amount of money they spend.
This is why they keep wondering why they have so little left at the end of each month, even though they may be earning well.
Those who want to avoid this problem are people who do not have full control of their finances.
To gain control and stop wasting, you need to find out exactly how much it is costing you to live, which means being totally realistic about your spending habits.
This is not a mental exercise. You cannot possibly calculate your exact level of income vs. expenses in your head.
To get real and meaningful answers, you must write down every penny you spend on anything, which would include money spent on items such as interest on loans, magazine subscriptions, and even charitable donations.
That change you drop into the Salvation Army collection pot at Christmas, even though it is a voluntary expense, is still money that you are spending. You cannot ignore it if you want to know your exact cost of living.
Many people don’t pay attention to their spending habits because they either don’t want to know or don’t want to take the time to find out.
As a result, they lose control and with it, the opportunity to improve their finances.
These are the individuals who are always complaining that they don't earn enough or that stores charge too much, but who do so while sipping six-dollar cups of coffee and eating the most expensive meals on a restaurant's menu!
How Much Do You Earn?
Few people can tell you how much money they earn.
Most will look at their pay stubs and assume that the figures they see there represent their earnings.
This is not the case.
What you see on your paycheck is what is left over after deductions, such as those for Social Security, Medicare, and other items that have been subtracted from the gross amount of your actual income.
The point here is that what you earn and what you actually receive are two different amounts!
This is important for you to know because if you plan a budget based on your gross earnings rather than on your net income, you could easily overspend and create financial problems for yourself!
How Much Do You Spend?
Finding out how much you earn is much easier than determining your total expenses because there are so many small variables to consider.
- How much do you spend annually for gum?
- What do you pay for haircuts (including tips)?
- What are you paying for a cup of coffee each time you eat in a restaurant?
There are also one-time expenses that you tend to pay and forget about until the next time they come due, such as
- Driver's license renewal costs
- Dental cleanings
- Oil changes for your car
In themselves, none of these items may seem to cost much, but the truth is that they are the very things that make you wonder where your money went!
What is important to remember is that it is not how much you earn but how much you have left out of your earnings that matters.
Does Making a Budget Help?
There is no question that making a budget and sticking to it is one of the best ways to maintain control of your finances.
However, if you do not include items like those mentioned above, your budget won’t work!
People tend to budget for big-ticket items like housing, food, medical care, clothing and transportation, but often forget that the interest on the money they owe is also an expense.
- I can remember talking to a fellow about his cost of living. He told me he was completely debt free.
- However, after probing him a bit, I found out that he had a mortgage on his home and a loan on his car.
- He was kidding himself about his circumstances and, as a result, really did not know what it was costing him to live because he was excluding the interest he was paying on his debts, which came to thousands of dollars every year!
The bottom line is that if you are going to make a budget, you have to do as Dave Ramsey advises and include everything that you spend money on, not just the things you consider to be the most important.
Small Expenses Add Up
My husband and I used to be in the trucking business. Every time we stopped to eat at a truck stop, we could hear drivers complaining about how little money they were making and how much their travel expenses were costing them.
At that time, a cup of coffee cost a dollar. The average driver would stop at least four times daily for coffee. This means he was paying $4 per day, $28 per week, or $112 per month just to drink some coffee.
Since most men drove at least 10 months out of each year, many were paying $1230 per year to drink coffee!
We did not do that. Instead, we carried a large thermos and asked the waitress at the truck stop to fill it with hot water for us. We kept a supply of paper cups, instant coffee, creamer, sweetener, tea, and hot chocolate in our Peterbilt.
We’d share a cup of coffee for breakfast, get the hot water for free, and while everybody else was paying $4 per person per day for coffee, we were paying $1 for the two of us (refills were free). This meant we were saving $1860 per year simply because we understood that being careful about small expenses could save us a fortune!
Costs of Living Vary Greatly
Because everybody lives differently, it is up to you to do the work involved in finding out your own annual cost of living.
It's also important to understand that your geographical location can make a huge difference in what you pay to live. San Francisco, for example, is one of the most expensive places in the US to live, while Mississippi costs much less.
What this means is that you might be able to afford to buy a house in one place that you otherwise could not afford if you lived somewhere else!
Furthermore, finding out what it costs you to live is a job you need to do every year simply because what it costs you to live from one year to the next will change due to issues such as
- Buying a house
- Changing jobs
Thus, you will have to make an educated guess about some expenses.
For example, I know how much I pay to get a haircut and what I give for a tip. I may not get one every four weeks, but I assume that I will. This way, I can estimate my annual cost for that item.
How to Create a Chart
The best thing you can do for yourself is to create a spreadsheet of expenses, which I call a cost of living chart, that you can refer to regularly.
To make one, you will have to look at credit card receipts, your checkbook, insurance papers, utility bills and other similar items.
It's also a good idea to carry a small tablet with you and note daily expenses on it. Then transfer them to a spreadsheet you keep on your computer. Doing this will catch "the small stuff" and make creating your chart much easier.
From these sources, you create the basic information that you will need to build your personal chart.
To help you, I’m including my own so that you can see what I’m talking about.
Notice that I include something called “miscellaneous.” I always put more in this column than I expect to pay out to cover small expenses I may have omitted, such as the cost of getting the car washed.
Once my items are placed on the chart, I write in the annual and monthly estimated or real costs.
Finally, I add these up at the bottom.
Now I have a pretty good idea as to how much I am going to have to pay for the current year in order to live.
Income vs. Expenses
To the right of my estimated expenses, I place what I expect to earn from all sources.
For example, I might include items such as gross income, part-time employment or CD interest.
I then total the figures.
- If my expenses are more than my income, I’ve got a problem.
- If the reverse is true, this means I will have money left over that I can use for savings, investments or items I may want to buy.
Once you have your results, bear in mind that you will have to pay income tax on your gross earnings, so you might not have as much to spend as you think you do!
By looking at your tax forms from last year, you can get a fair idea about what that figure will be. Subtract it from your total gross earnings.
Now you know how much your net income is and can compare it with your cost of living!
Benefits of Knowing Your True Cost of Living
You may be thinking that seeking out all of this information and placing it on a chart is a waste of time, but the truth is that you cannot really know where you stand financially in life if you don’t do this.
If you create a new chart each year that reflects your current income and expenses, you’ll be able to tell whether you are progressing or falling behind.
This is important information because it can help to guide you to better decisions and can protect you financially.
I've included an interesting video that shows what things cost. This may help you to understand a little more about how much you have and what you can afford to buy!
Your chart will allow you to see if you’re paying too much for a certain item or earning too little on an investment so that you can have the opportunity to make changes.
My husband and I let ourselves become lax about an investment we made. We were shocked last month when we did our cost of living chart and realized how little this investment was earning.
With a few phone calls, we were able to reinvest in a different product with a different bank and significantly increase the income we would receive.
You can do the same simply by paying attention to what you are spending, creating a complete and correct cost of living chart and making changes as needed.
Taking the time to find out what you really are spending to live can definitely bring great benefits your way.
This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.
© 2017 Sondra Rochelle
Sondra Rochelle (author) from USA on July 24, 2018:
Finn Liam Cooper: Sticking to a strict budget is hard, so you need to leave some room in it for extras. The key to success is to determine the difference between wants and needs and then try to find ways to get what you need and pay less to do it!
Finn from Barstow on July 23, 2018:
A great article on a topic that we all should be conscientious of. Sometimes things are easier said than put into practice. However, if everyone were aware of their spending habits and managed to live within their means through their budgets, no one would be in debt. No one would need credit cards.
I've tried this several times though, creating a budget and I manage it for about a week - maybe a month even - for awhile and then slip. Why?
i don't know.
But you've inspired me to try again.
Sondra Rochelle (author) from USA on December 21, 2017:
Michael Duncan: I obviously agree with you. It's too bad that so many people fall for the hype and let their emotions take over when it comes to spending. Maybe this article will wake a few people up...life is becoming increasingly expensive!
Michael Duncan from Germany on December 21, 2017:
It is essential to exercise sound financial judgement and practice living within our means especially in these times of avarice and overindulgence. Moreso as we engage in another festive season where the typical mindset, regrettably, is to spend more and handle the financial consequences later. In order to do so, there is need to increase our awareness and exercise discretion. So thanks for highlighting these fundamentals. Cheers!