Principle #2: Identify ALL Expenses
June 26, 2012 § 1 Comment
This second principle has the power to transform your mentality forever: Identify ALL Expenses. If you took part in Principle #1, you have figured out what you actually make. Now we must figure out what is going out.
Most people’s financial situation is like the image above: it comes in and then it goes out (PS: In-N-Out Burger, Please come to the East Coast!). You’d be surprised how many people have no idea where their money is actually going. Rachel and I were fairly frugal, but when we actually went through this step of tracking expenses, we were floored. It totally explained how we could earn more than ever, yet still have very little, if anything, left at the end of the month.
The key here is to write everything down. Claude Hamilton, a leadership coach in Canada, suggests that you carry a small notebook around with you to write down every penny that leaves your pocket (stick of gum, cup of coffee, 50 cent toll, etc). In Orrin Woodward’s Resolved book, he states,
Anything that flows out of one’s possession into another entity’s hands should be written down: all bills, all taxes, everything that flows out of [your] money pile and into someone else’s money pile.
Your recurring expenses will be the easiest. Just go through your past few month’s of bills and write down each one. The harder part is accounting for the miscellaneous expenses to maintain cars, houses, unexpected events. Be liberal when counting your expenses. You can try to deny that spending is out of control, or you can face the brutal reality.
Remember what I said earlier: be conservative when estimating your income and be liberal when estimating your expenses.
If spending frivolously is an issue, a person should start a cash allowance, setting aside a certain amount of cash for himself and spouse to limit spending within the set limits. –Orrin Woodward
These first two principles are all about acquiring knowledge. You may have heard the statement that, “knowledge is power.” This is FALSE. Knowledge applied in a purposeful direction is power. The next step will challenge us to do just that.
Stay tuned for Principle #3: Reduce expenses to… (see you soon)
Keep Reading and Leading,
David J. Garza