So far we’ve looked at why it’s a good idea to take a look at your finances, how to build up a cashbook from your bank statements in Google Docs (Google Drive) and now we’re going to roll our sleeves up and start to do some analysis of the cashbook we’ve made. As everybody’s situation is different, this post in the ongoing series on managing your home finances will by it’s very nature be quite general but the principle behind everything that I am going to talk about is really the key to it all: understanding. If you can understand what you spend your money on, you can change it. The French philosopher Foucault wrote at some detail on the theory that knowledge is power and he couldn’t have been more right in this instance. Always out of cash at the end of the month but have no real idea why? That needs to change!
Many people are turned off by the idea of financial analysis, either assuming it’s boring or it’s too complicated for them but neither could be further from the truth. For example, a quick look at how much you might spend a day on that “meal deal” for your lunch might show that the exceptionally reasonable £3.50 for a sandwich, drink and a snack (often only pence more than the sandwich itself), might lead to the realisation that you’re spending £17.50 a week, £70 a month or over £700 a year (taking into account holidays) on your lunch. That’s a lot, and is roughly equivalent to my first take home pay cheque and nicely illustrates the point that it tends to be the little but regular amounts that swallow your money rather than the big but infrequent spending. After all, if you could spot three or four big items that took all your cash, you wouldn’t really be stumped as to where it was all going would you?
What then is the best methodical way to do this analysis?
There are several approaches to take, and rather than suggesting one over another, I would suggest methodically applying them one after another for the initial analysis and then refining it with what works best for you on subsequent exercises.
A general review:
- Look for cashbook categories that are higher than you expected and;
- scan the detail to find out why that category is higher than expected- is it down to unexpected spending or are you just spending more in total than you thought? (Like with the lunch example above).
Look for patterns:
- Scan particular times of the month when you seem to spend more.
- Is this discretionary spending or regular bill payments?
- If it’s discretionary, is there an event you can tie in to it? For example do you spend heavily to cheer yourself up after a monthly sales meeting or something similar?
- Are there semi regular (eg quarterly) payments that seem to catch you by surprise every time? It may be time to budget for them if there are!
Compare and contrast:
- Speak to friends or work colleagues and find out what they think is a reasonable amount for various things- they might pay half of what you do to heat their home or have very different ideas on what a night out with their friends costs. Around ten years ago I worked with a chap who was adamant that a night out with his mates couldn’t cost less than £100. This shocks me to this day and goes to show that you shouldn’t make any presumptions over what people think is reasonable.
- Many price comparison websites and magazine/newspaper articles will give an indication of the average cost of something. The government also provide this via the Office for National Statistics, although their website isn’t very friendly, and invariably it’s their data that drives a lot of the magazine articles. Data like this is useful to see if you’re paying too much for something.
Those are the basics of cashbook analysis and they’re hardly rocket science but they do provide a very good framework for ensuring that you’re picking out anything that might potentially be an area you can address. In the next post, I’ll be looking at how to factor in annual or semi regular payments into your analysis and how best to account for them.