Personal Finance 101: Expenses & Saving

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Welcome to the third installment of the Personal Finance 101 series: Expenses & Savings. I've included links to the other articles in this series at the end of this article.

Let's face it, no one likes to deal with expenses. They can be a constant thorn in our sides and become a significant burden on our financial lives and, if left to get out of hand, on our personal lives as well. Sometimes you might feel trapped in an unrewarding job because your expenses have gotten to the point where a single missed pay cheque would mean defaulting on bill payments. That's not a fun situation to be in.

In this article we'll take a at expenses and why reducing them and saving is so important. As always, I'm going to start things off with an diagram to help us visualize the concept and then I'll explain in more depth once when got the picture to refer to.

Personal Finance 101: Expenses & Saving: Saving on expenses can be a powerful tool for getting control of your personal finances since money saved is tax free.Personal Finance 101: Expenses & Saving: Saving on expenses can be a powerful tool for getting control of your personal finances since money saved is tax free.

Where is All My Money Going?

One of the reasons expenses can become such a problem is that there can be so many of them. Unlike income which, for most of us, comes from a single source (an employer), expenses usually come from all over the place. This makes it very difficult to get a clear picture of where all this money is going. A typical list of expenses might include:

  • Shelter: rent, mortgage, property taxes, etc.
  • Utilities: phone, internet, cable, heat, electrical, etc.
  • Transportation: car payments, gas, repairs, etc.
  • Many others: debt payments, clothing, food, entertainment, medical, insurance, gym membership and on and on ...

So you can see how things can quickly get out of control without us really noticing what is happening. Then suddenly it seems like we can't make it to the end of the month anymore. So a key to getting a grip on our expenses is understanding where they are all coming from.

I'd Prefer to Just Make More

Yes, I would prefer to make more money too. I'm sure most of us would. Unfortunately, our bosses don't always agree so it can sometimes be a long wait until the next pay raise. So, I'll let you in on a little trick that I use to get me in the expense cutting mood: Try thinking of your expenses as potential income. You see, it's all about cash flow. Just like in our diagram above, money comes in and money goes out. In order to get more money for ourselves, we either have to increase what we earn or decrease what we spend. From the point of view of our wallet, these two activities achieve the same result: more money for us. So either one will do the trick. In fact, cutting expenses is a more effective way to get more money than getting a raise. This is because money we earn is taxed but money we save is tax free.

Do Everything You Can to Keep Your Hard Earned Cash

Remember how much work sucks? Remember how much of our income disappears to taxes? It's a tough slog to get money in your pocket these days. Well, once the money is in your pocket, that's it. It's yours to save or to spend. So scrutinize all those expenses and find the potential tax free income hiding in there. It makes a big difference to your bottom line because the money you save goes directly back into your pocket.

Do you really need the Super Ultra Platinum cable package or could you go with basic cable or no cable at all? How about bringing a lunch to work instead of eating out? Instead of buying three new shirts, just get one. Go to the movies once a month instead of every week. Don't deprive yourself just cut back a bit or substitute a big expense for a smaller one. Just do something to cut back to get yourself started.

Remember the last diagram in the article about Income & Taxes where we learned that in order to get $100 from employment we need to earn $139.47 before taxes and deductions? Well, in order to get $100 from saving we only have to save $100. Saving $100 is the same as earning $139.47. So for every $100 you save, you essentially get a free $40. Love it!

Bad News is Good News

So, the bad news is that expenses are way harder to keep track of than income. The good news is that this likely means that you'll find at least some, if not a lot, of potential income in there. And it gets even better because this "found money" is tax free so you are way better off than if you had earned it directly. So get started! I hope you find a pile of money you never knew you had!

This article is part of the Personal Finance 101 series.


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