Analyzing Your Personal Finances: Categories to Take Action
As we say around here: “Personal Finance is Personal!” I can go through the math and my own decision making process of the many personal financial decisions you may be facing and that will be a helpful data point for you, but it does not replace your own perspective and analysis. Which is why today, we are going to discuss one way for you to perform your own personal analysis over your financial situation and how you can take action as a result.
I’m going to assume you have done your homework on your personal finance situation and have created a budget for yourself that outlines your income and expenses by month. Once you have that set up, you are ready to identify where what line items can be changed to better fit your personal financial goals. With your budget in front of you, I want you to put your expenses into the following categories:
Practically Set in Stone: This category will represent anything that you cannot realistically change in less than 3 years. The only thing that I would expect anyone to have in this category is a fixed mortgage on an owned property, and large amounts of student loan debt. By establishing these as the expenses that can’t be altered in the short or medium term, you are able to quantify them and tell yourself “I just have to deal with this,” while spending more energy worrying about the other two categories.
Impactful: This category will be the top 2-3 items on your list in terms of monthly expenses that are not Practically Set in Stone as described above. This will typically include apartment rent, car payments, and other debt than could be paid down in this three year window. While not immediately actionable, these expenses make up a large portion of your monthly spending and if push comes to shove, you should look at how you can change these first since they have the biggest impact on your bottom line.
Discretionary: This category will represent expenses that you could change in the next week if you had to. For most people, this includes a grocery budget, personal spending, and savings. It’s important to understand that while these aren't (and really shouldn’t be) the bigger line items in your budget, they can be changed with little notice. If you find yourself in a place where a change needs to be made quickly, making a few little changes like adjusting your grocery, saving, and weekend spending, may be able to tide you over until you can make a single bigger change like moving to a smaller apartment.
Once you have placed your budget line items into these categories, start running the numbers to see what needs to change to align with your long term plans. Here’s some examples:
I want to buy a house in a few years which will require me to save up for a down payment. I’m going to start by spending less on going out to eat every month (discretionary expense) and eventually move in with my family to save aggressively once my apartment lease (impactful expense) expires.
This car payment (impactful expense) is really eating into my monthly cash flow because of its high interest rate. I’m going to shift some spending away from my hobbies (discretionary expense) for a few months to get this thing paid down.
While it may sound obvious to some, this exercise is incredibly important for those who do not monitor their spending categories closely. These little changes and conscious decisions will add up, and putting your expenses into these categories will help you determine what the best next steps are.