The last thing the world needs is another blog telling you that you should stop smoking, drinking, going to the casino, or even eating out. Far more qualified people than us, such as health professionals, have pleaded their case, and yet millions of people still do these things.
Some people would desperately like to break one or more of these habits, but are unable to due to addiction issues. Others are aware of their habits, but have consciously decided that they are satisfied with the way things are, and that there is no reason to change.
What You Don’t Know Could Be Hurting You
If this describes you, that’s fine. We’re not here to judge you or tell you how to live your life. With that said, one thing that surprises us as we meet with people who visit our office of Licensed Insolvency Trustees is that most people don’t know how much their habits cost them financially. How can you make a conscious decision that something is worthwhile if you don’t know what it costs? How can you be satisfied with the way things are if you don’t know what the alternative is?
An Easy Starting Point
One of the most important parts of learning to better manage your money is learning to budget better, and one of the most important parts of learning to budget better is understanding your current spending patterns. It is tough to create a budget without knowing how your spending is being distributed presently.
It is much easier to tweak your current spending in order to meet your needs and goals than it is to create a budget from scratch and to try to stick with it. If you arbitrarily allocate your spending based on your ideal distribution of your money rather than where you are used to spending it, you will likely get frustrated and walk away from the whole idea of budgeting.
Budgeting Doesn’t Have To Be Hard
With that in mind, one of the first steps to successful budgeting is to track and categorize all of your spending, including the money spent on your habits. This can be done by reviewing your last month or two of bank and credit card statements. Allocate all of the money that you have already spent to categories, or alternatively, track all of your spending for a month or two going forward. Be honest with yourself, and try to be as detailed with your categories as possible.
For example, don’t lump your groceries, restaurant, and takeout meals and drinks into a basic category such as “food”. Break them out into their individual segments so that you can see how much is spent in each area. It’s too easy to combine them all, say “well I’ve got to eat” and decide that there is no room to cut back in this area. Even though both groceries and takeout are “food”, the cost per meal varies greatly, and changing the allocation of your meals between them can make an enormous difference in your budget.
Many people are afraid to do this because they know they are spending more on their habits than they would care to admit. It is very important that you are honest with yourself about your spending in these areas. That way you can make a fully educated decision about whether or not that is truly how you wish to spend your hard-earned money.
If you spend $150 per month on your daily takeout coffee, do you feel that you get value for that money? Or would you rather take that $150 per month ($1,800 annually!) and spend it on something else? And if you didn’t know how much you were spending on this habit, how could you decide?
The Real Cost Of Your Habits
The importance of making a conscious decision becomes even greater when it is a decision between spending on something such as a habit, or increasing your debt repayments. If we continue our takeout coffee example, let’s say that at the same time you are spending $150 per month on coffee, you are carrying a credit card balance with a not-unusual interest rate of 29.9%. This means that you are effectively financing your coffee purchases at 29.9% interest.
If you had put this money towards debt repayment instead, you would be saving the interest on this money. Over the course of the year, if you had put your $1,800 to debt repayment instead of the takeout coffee, you would have roughly (ignoring compounding and the distribution of your debt repayments) $2,350 less of debt at the end of the year.
This is known as the “opportunity cost”. Because you are spending money on your habit, which seems inconsequential when viewed on a daily basis, you are missing the opportunity to save interest on your credit cards. If you hadn’t tracked your spending and noticed that you had a $150 takeout coffee habit, would you have even thought to make this change?
Making A Small Change
As we all know, habits can be hard to break. There are some small changes you can make to things that you do regularly that can make a huge difference to your finances. The first step is to know how much you are spending on these habits, so that you know what kind of changes are possible.
However, sometimes circumstances are such that all of the budgeting in the world won’t help. You wouldn’t be able to make a dent in your debt even if you cut all of the spending on enjoyable things from your budget and lived like a monk for the next five years.
If You’re In Too Deep
In these situations, a Consumer Proposal or bankruptcy might be the only way for you to regain financial freedom and the ability to spend your money on the things that are priorities for you and your family. If that seems like it might be the case, reach out to the knowledgeable Licensed Insolvency Trustees at L.C. Taylor for a free, no-obligation consultation at our Winnipeg or Kenora office, or by telephone from anywhere in Manitoba or Northwestern Ontario.