Saving Money – Understand Your Spending

In the previous article, we discussed on How to Organize Expenses to understand our actual living expenses. Here we will discover our financial position by understanding our spending.

In order to understand your spending, start calculating your expenses. Follow the step by step procedure given below:

  • You now have the list of expense headings. Write the amount beside the expense headings and total all the expenses.
  • First major thing you need to do is to calculate the discretionary income – income left after deducting ‘Fixed expenses’ and ‘Variable expenses’ from your post-tax income. You may get a positive or a negative value.
  • You will be typically shocked by the small amount of discretionary income compared to your gross salary, but this is normal.
  • Now from the discretionary income, you need to deduct the ‘Periodic’, ‘Discretionary’ and ‘Contingency expenses’ to know your actual financial status.
  • If amount left after deducting these expenses is positive, you can say that you are in surplus. But if the amount left is a small percentage of the gross income, you need to curtail the expenses in order to be more financially flexible.
  • If you get a negative value, you are in deficit. You have a lot of work to do and be financially smart to attain financial freedom. Go back to your expenses, especially discretionary expenses and see where you can reduce the unnecessary expenses.

It may surprise you that in the first systematic study of millionaires which was summarized in a book “The Millionaire Next Door” found that millionaires had frugal spending habits. Even if you don’t want to be a millionaire, you still need to be frugal to lead a decent life. Financial intelligence helps to control the unnecessary expenditure and increase the savings.

Note: Just enter all your expenses in the detailed spreadsheet, ‘Spending Analysis and Annual Expense Categorization‘ to know your financial situation.

We strongly suggest you to read:
How To Save Money
Best Ways to Save Money – Easy to Implement
Quickest Ways to Save Lots of Money – Big Savings Fast
Habits that Save Money
Saving Money – How to Organize Expenses
Spending Analysis and Annual Expense Categorization

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