Needs, wants, and luxuries - there's a payoff in knowing how to tell the difference
The talking heads on TV and self-styled financial pundits in print have had their epiphany.
It's time to get back to basics, many proclaim. Their latest advice, dispensed with the customary ring of authority, is to keep track of the money we spend - a practice some of them concede they've never done themselves.
I guess it takes a financial crisis to see this simple truth. For 18 years in this column, I have emphasized that keeping track of expenses - and by doing so, identifying areas where we can cut back - is the most useful and illuminating financial exercise we can do. And it is something I've done all my adult life.
So allow me to share the "secrets" of getting the most out of this expense-tracking exercise.
For starters, you don't need software, although programs such as Quicken or Microsoft Money - or a basic spreadsheet program such as Excel - will make the job easier. And you don't need to go online and enter a bunch of passwords to download bank and credit card transactions that classify expenditures automatically. I've never bothered with that for reasons I'll explain.
Carry a pen and a pocket notebook where, at least for the next six months, you'll write down all expenditures. And I mean all, from the monthly mortgage or rent payment to the soft drink from the vending machine.
The minute you start skipping some, you defeat the purpose of this exercise: to show where your money really goes, and how little (and often wasteful) expenditures here and there can add up.
Writing down all expenditures, or entering them manually if you use a spreadsheet or software, also forces you to think about each one. Downloading transactions does not.
I also find inherent flaws with automatic classification. Money spent at the supermarket, for example, is not always for groceries. (It could be for toothpaste, magazines, even DVDs.) You need to break down the categories yourself.
The categories will depend on your spending habits. I recommend two basic groups, "needs" and "wants." (You may want to add a third, "luxuries.")
Among my needs are car expenses, charitable contributions, clothing, groceries, sundries, healthcare, home-related expenses, income taxes, and life insurance. Among my wants are hobbies, outings, travel, and video rentals.
Not everyone will agree on what a need is. For me, basic cable and high-speed Internet access are. Premium cable channels are not. Forcing yourself to thoughtfully distinguish between personal needs and wants is another benefit of this exercise. And rather than be restrictive, keeping track of expenses can be liberating. You may find, as I have, that you can spend more than you thought on wants, or even on a few luxuries. You'll have more money for them when you start eliminating some waste from your expenditures list.
Humberto Cruz is a columnist for the South Florida Sun-Sentinel. He can be reached at AskHumberto@aol.com. 