Day 10) Knowing Where My Money is Going is More Important Than Ever

This guest post by Mike of Richer by the Day is part of Where’s My Money Going? Month. Mike is shares the story of why he and his wife started tracking their income. He also writes for the Lending Club Blog.

I remember asking myself “Where is my money going” a few year back. My wife and I were considering the question not because we didn’t seem to have enough to cover expenses, but rather didn’t seem to be saving as much as we thought we should. We were both making great money, but our net worth was rising more slowly than expected. The final straw came when, despite a feeling of having too little take home pay to begin with, we still owed a huge amount with our tax return.

We decided to get serious and started tracking all of our income and expenses. Like so many others who have taken that step, we were amazed to see how many wasteful areas we had in our financial lives. We quickly started making changes that had a huge impact. Along the way we made another minor adjustment that multiplied the effect: we started paying ourselves first.

Rather than having both paychecks go into our checking account and transferring whatever we could to savings at the end of the month, we started having one of our checks (both were for about the same amount) deposited directly into savings. The amazing thing was that because we never saw the money and were reducing expenses in general by tracking our finances and eliminating waste, we essentially started saving half of our take home pay up front with only minor changes to our lifestyle.

We have since tracked our income and expenses with great detail and have been doing significantly better financially. Still, two major events in 2009 are causing us to take an even closer look at our money: our income went down and our housing expenses will be going up. Both events are related to the birth of our first child in 2007. My wife dropped down to part-time work at the start of this year to spend more time at home and we’re planning to move closer to family.

Even though my wife is still making a lot of money working 3 days a week, having her income drop by 40% is still a big hit. Housing in our future hometown is going to cost about 3X what we’re paying here. Financially, the move and dropping to part time don’t make sense, but they are still the right decisions for our family. The two events combine for about a $50,000 difference from last year to this year. We were saving such a large percentage of our take home pay (almost 75%) that this delta could easily be handled by simply not saving, but we want to continue saving aggressively and feel that there are other places we can cut.

To start, we decided to cut all discretionary spending by 20%. When I say discretionary, I don’t just mean spending on wants. Rather, any expense that isn’t dictated by others was cut by this amount. Obviously I can’t arbitrarily cut some utilities or my mortgage payment by 20%, but everything else (like groceries, clothing, auto expenses, etc) faced this cut.

An amazing this has happened once again, just like it did when we started paying ourselves first. We’ve simply adjusted to the new budget limits. Our awareness of the weekly amount that we’re allowed to spend at the rocery store, for example, has forced us to get creative, shop sales, and eliminate wasteful purchases to meet our new goal. While there is a noticeably greater effort required, the end result is not noticeable at all. In other words, we seem to be eating just as well as we did before, it’s just taking a little more work but costing a whole lot less. In a competitive household, it’s become a game of sorts to see who can do the most with the least.

I have no doubt that we’ll find a way to make our new situation work. That’s why I have no problem making good decisions even if they seem to have negative financial consequences. My wife wanted more time at home and we wanted to be closer to our family. To us, family became more important than money. By making the right decision for personal reasons we inspired ourselves to make the finances work as well and are quickly eliminating the negative financial consequences we thought were standing in our way.

It is largely due to our detailed tracking of where our money goes that we’ve been able to make positive changes in our lives that have, through the years, brought both personal and financial success.

This post was part of Where’s My Money Going? Month. Tomorrow I’ll start a 3-day review of online money-tracking software.

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