Expense Logging Analysis Part Two: Using The Expense Grid

As you read in Expense Logging Analysis Part One, the money you spend falls into four distinct categories: F/N, F/D, V/N, and V/D.  Each has distinct characteristics which can be used in your analysis and will benefit you in different ways.  For a detailed description of each, follow the links through.

The question now is what to do with this information.  It isn’t enough to simply categorize what you learn about your spending habits: you have to act on the new knowledge!  Read through the description of each square in the grid.  You’ll find a brief summary of what belongs there as well as an analysis of how to reduce or improve the related finances.

Below you will see two squares.  Both are true examples from my own personal life; you will see the percentages of my expenses I spent in each area.  Square one is what I spent in one month before I had really started focusing on using any sort of financially health measures… You could say it was before I went on my ‘diet.’

Rounded to the nearest whole percent.

As you can see, my actual proportions or expenses were quite a way off of what I recommend in this blog.  My Fixed Necessary costs were only equating to about 28% of my total costs – not too bad, but lower than what I would like them to be.  My Fixed Discretionary costs were far above what I like to see; I was spending too much on magazines and subscriptions.  The Variable Necessary category came in pretty low at only 21%, so I was not spending enough on groceries and other necessities, which leads us to the Variable Discretionary square.  This came in at a whopping 39% of my TOTAL expenditures for that month!  Something had to change.

Over the next twelve months I really started to buckle down.  My financial diet had begun.  I started scrimping and saving, keeping track of where my money was going.  I ate out less, cooked inexpensive meals, and effectively stopped going to see movies.  These, combined with dozens of other little changes, led to my new expense grid distribution, as seen in square two.

Rounded to the nearest whole percent.

This is my expense grid from exactly one year later.  Compare squares one and two!  As you can see, I made some decisive changes which dramatically impacted my expense profile. Note that my F/N category also now includes an automatic amount of savings transferred straight from my checking into my investments and savings account.  Even including this, because I shifted the distribution of my expenses to a much more ideal position, my overall expenses dropped by more than 27%!  I hope that over time I will be able to split it to roughly 50% for the necessary expenses, 30% into savings, investments, and other long-term vehicles, and 20% for the variable luxuries of life.

During the same time period, my income rose by about 10%, so the net gain to my savings was quite dramatic.  My quality of life didn’t suffer too badly; I think having to learn to say ‘no’ or ‘it’s not in my budget this month’ to friends was the most difficult part of it, but they were all supportive of my goals!  Many of them even took it upon themselves to try to do the same.

The expense grid is an incredibly powerful tool, especially for people just beginning on the road to financial health.  Look at your finances and create your own grid.  Where are the bulk of your expenses?  I’d wager that they are going to the F/N and the V/D categories more than you were expecting.  Next month, try to reduce your variable discretionary expenses by 5% and see how much better your bank account looks!

Tags: discretionary, expense log, finances, fixed, Income, investing, luxuries, necessary, The Expense Grid, tracking, variable