Taking it back to basics here, it is really beneficial for your (financial) wellbeing to know what you spend your money on. This way you know what you have to change, and where the biggest lever is to free up money for saving or paying off debts.
Part 1 – Essentials
These are essential bills that have be paid mostly monthly:
Rent/mortgage, electricity, gas, council tax, mobile, internet, some monthly insurances
Do not forget yearly or 6 monthly bills, such as water, ground rent or maintenance costs or some insurances. Sum this up and divide it, so you can add this to your overview.
For example our water bill for 6 months is £135. Divided by 6 = £22.5 per month.
The essentials will usually make up the biggest bit of your expenses. Ideally essentials should not be more than 60-70% of your income at max. If you take home an income of £2,700 your essentials should not exceed £1,700.
I do not add transport (car or train) to this block, because transportation costs can be ceased (no petrol bill if you do not drive to work).
Part 2 – Personal spending behaviour
For this, you need to have a closer look and do an expenses overview. It is really simple, take a piece of paper. You can also do it electronically, in excel or google sheets.
It is looking at daily spendings per spending category, like so:
In the last row sum all spendings of one category together to get to a monthly total. In the end you know that you spent (for example) £57 on clothing and £61 on coffees to go in that month.
Do not judge your spendings, just take an inventory.
Start with one full month and open your banking app or take the bank statement of the month. Don’t forget credit cards and pay pal if you use them. If you pay most things by card or online it will be easy to go through payments and add them to your list.
If you pay a lot by cash and don’t know what you spend the cash on just label it “cash” for now. If this is a substantial part of your outgoings and you don’t keep receipts I suggest to keep an expenses diary in the coming months or keep all cash receipts to work through them.
The spending categories I used for my spreadsheet were:
- Coffee to go/Lunch
- Pub/night out
You can be as detailed or high level as you want, but I recommend to be as detailed as possible to begin with. An example to why this is important:
If you label all coffee to go, outside lunch, take-away and supermarkets food “FOOD”, and realise that this spendings block is way too high or increases over time, you will not know what exactly in the mix causes the problem. Ih you know it is the take aways which increased over time, you know what to cut back to get it under control.
If you do one sheet per month you will see changes in spendings overtime and get a good feeling on how much you spend on average per category.
Part 3 – Adding it all together and put it next to your income
That’s it. Now you know the truth. Should you discover that you spend more than you get in (via credit card or by going into overdraft), you can now look at all the categories and decide where you want to make a change.