Get rid of that “oh shit” feeling when it comes to your finances

Consider the following situations:

You think your finances are going great… and then BAM, you get slapped with a $600 car insurance bill due in 4 weeks. 

You take a weekend trip to Las Vegas with your friends and swipe your credit card carefree for all your purchases: hotel stay, entertainment, dining out and your bar tab.  “I’ll look at my receipts and worry about paying for this later.”  30 days later you get your credit card bill.  You compare the posted charges to all of your saved receipts to make sure they are all legit.  And they are.

Your car engine breaks down and you suddenly need to come up with $1,500 to repair the transmission.  You don’t have an emergency fund. 

Consider your response to these situations: “oh shit.”  

I’ve had my fair share of financial hangovers.  In college I used to swipe, swipe, and swipe my credit card for everything.  I wanted something and then I paid for it… on credit.  It was great and I got everything I wanted.  It was instant gratification.

Then the credit card statements came in.  “Oh shit”, I’d say to myself, “I spent THAT much on eating out, clothing, and gas?!  Oh well, I’ll pay the minimum payment just this once, and I’ll pay it off next month.”   The next month came, along with the month’s minimum payment.  Interest charges started to add up quickly, especially since my credit card was charging me with a rate of 20+% APR.  Next thing I knew, I was in a mountain of debt. 

College life for me was all about hustling to make money in any way that I could, from being a paid tutor, telemarketing, participating in research studies, and becoming a part time online reseller of products.  You can read more of my college hustling shenanigans in a previous post here.

I always eventually worked my ass off, saved up, and finally paid off the balance. 

Then the next month came and rent was due.  And a new Canon digital camera was released.  And a new Sony palm pilot was released.  Of course I had to save my paychecks to pay for my rent.  I had to have my new electronic toys.  All new purchases (books, gas, eating out, etc) had to temporarily be made on my credit card.  Next thing you know I found myself in the sick cycle of credit card debt again. 

I’ve been on that financial credit card roller coaster before; the ride is awful.  I was the credit card companies’ favorite customer: the customer that always paid finance charges.  Something had to be done.  I was sick and tired of looking at my finances and muttering those two words: “oh shit”.

I discovered the Pocketmoney app sometime around 2003 when I was finishing up with my college degree.  Pocketmoney is a simple finance managing application that lets users track their income, expenses and cash flow.  I was using a palm pilot back in 2003 and this app literally saved my financial life.  It helped me realize the power of tracking my finances.  

Edit: I can no longer completely recommend Pocketmoney because the new version of the app keeps crashing.  It doesn't lose your data but you need to constantly reopen the app once it crashes.  I'm not sure the developers are in a hurry to fix this software since last I heard, the main software developer passed away.

The key to saving and building wealth begins with tracking your spending. 

Small and seemingly harmless expenses add up quickly.  Do you know how much money you spend eating out for lunch each month?  If you spend $7 eating lunch with your coworkers 5 days a week, that’s comes out to be $140 a month and $1,680 a year.  If you were to invest this amount for 10 years, you would be $24,220 richer (assuming a 7% return).

Once you start documenting and tracking your spending for a while, the whole process becomes habitual and even enjoyable.  Categorize your purchases into a few categories such as: food, entertainment, gas, bills, shopping, charity, etc.  Make a purchase and then immediately open up Clearcheckbook (or even use a simple notepad) and jot down how much money you spent and its category. 

If you absolutely can’t stand to track your finances manually, you can start off with Mint, which will help you track and categorize your income and expenses automatically.  I prefer to track my spending manually, since this makes me much more actively aware of what I am doing with my money.  I use mint as a backup.

At the end of the month, see how much money you are spending in each category of expenses.  You might be surprised to see exactly where your money is going. 

Simply being mindful of where your money is going will help in the behavioral change necessary to reach for bigger financial goals.  It’s all about financial awareness and being conscious as to what you’re spending money on.  “I spent THAT much eating out this month?  What did I gain from it besides a few pounds and tighter fitting pants?  I could have put away an extra $500 into my investment account this month instead.”

Being aware of where your finances stand will help you avoid that sudden, shocking, and sinking “oh shit” feeling.  You won’t find yourself swamped with bills that need to be paid, and not having enough money in the bank to pay them.  You will know exactly what your credit card balance is before you get your statement.  You will know exactly how much money you have in the bank and you’ll never get an overdraft charge. You will be more connected with your money.  Spending money on frivolous items won’t give you the same pleasure as seeing your wealth grow.

Tracking your spending can benefit more than just your financial health.

In 2006, Australian researchers Ken Cheng and Megan Oaten designed an experiment where subjects were instructed to write down every purchase they made.  The end result was not just an improvement in the participants’ finances.  Improving the willpower of the participants' control over their spending habits had a ripple effect of spilling over into other life improvements.  Participants smoked less, drank less alcohol, ate healthier, exercised more, and were more productive with household chores. 

The researchers’ findings are published in the Journal of Economic Psychology in an article titled “Improvements in self-control from financial monitoring.”

If you want to improve your finances (and much more), tracking your money is one of the first steps.  If you don’t document and monitor where your money is going, you may never be able to control your debt or build real wealth.  As your financial health improves, you may find your physical health, productivity and happiness improving as well.  Once you start getting a grasp of where your money is ending up, you can move on to the next step: building a proper budget.