I am a financial strategist. I tell people how to manage their wealth. But I have a confession to make: I did not have my own personal-finance aha moment until several years ago. For decades, I had blissfully blurred the line between “wants” and “needs”—until I got a divorce, which is when those two things were put in stark relief. To maintain my pre-divorce lifestyle, I realized, I needed to immediately bring home five figures each month. I did not need or want that kind of pressure.
Each of us may have a moment like this. You may think you are protected from it; I did, too. But here is the thing: Even if you do avoid a life-changing financial shake-up, you should always understand how you use your money. And you cannot accomplish that until you divide your spending into many little pieces.
Here is how I learned to do it.
Right after my divorce, I had to downsize fast. To do that, I needed to figure out what my true needs were. What were my critical expenses? That seemed to be straightforward enough: My mortgage was clearly a necessity, as were my property taxes, insurance premiums, car payment, phone and grocery bills. But the task quickly became more complicated—because each of those “need” expenditures was also based on my “want” to live a certain lifestyle.
So for three months, I tracked my spending down to the penny. Using credit card and bank statements, and cash receipts, I grouped my expenses into three categories: fixed, variable and discretionary. Clearly, my discretionary spending could be nixed (adios, shopping splurges). Then I zeroed in on fixed and variable costs. And once I had a list of those, I developed a two-part question and applied it to every expense:
1. Does this purchase fundamentally make my life better?
2. Is there a cost-effective alternative that provides the same benefit?
The answers led to two key conclusions: Damn, I wasted a heck of a lot of money! and I have more control over this than I thought!
Needing to put a roof over my head did not mean it had to cover 3,000 square feet. Same went for my grocery bill, which was out of hand thanks to my organic-food and expensive-wine habits. Within two months, I traded in the big house (along with its big utility bills, and big rooms to furnish and clean) for a tidy condo a few blocks away. I also replaced my precious SUV (and its high monthly payments, costly maintenance and gasoline bills) for a more affordable and reliable sedan.
Do you need to start making significant changes like these today? Of course not—and even if I said yes, I do not expect that you would put your house on the market tomorrow. But I strongly advise that, right now, you find some small way to cut your expenses. See how it makes you feel. Chances are, you will discover what I did—that you barely miss the old, more expensive thing, and feel great about your savings. You will teach yourself a valuable lesson, and one that you might return to in tougher times.
I kept going: I ditched the gym membership for a bike; I learned to say no more often to my kids (and wouldn’t you know it, they still love me). Poof! In total, I cut nearly $3,500 or almost P165,000 off my monthly nut.
And several years later, my quality of life has not suffered. I still get to travel when I truly want to, and I never feel I am living a life of self-deprivation. As it turns out, I simply did not need to make as much money as I thought to live a sweet life. And now that I know that, I know I will be fine if times get tight again. That knowledge, my friend, is worth more than anything else.
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This article originally appeared on Entrepreneur.com. Minor edits have been done by the Entrepreneur.com.ph editors.
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