CFO of Life #122: Where did our money go?

Where did my money go?

It is one of the scariest questions that you can ask yourself.?

It is scary to ask yourself where your money went, and you are probably bracing yourself for a tough realisation. It is usually an extremely difficult situation that doesn't make life easy. Still, it also gives you the perfect opportunity to get your life together and build a better future.

This week's newsletter will try to do just that. I will break down the topic into four points:

1. Where did my money go?

2. Why should you care where your money goes?

3. The 3 ways to track your money and their differences

4. Reclaiming control of your finances: The four spending categories

If this is your first time reading this blog, my name is Simeon Ivanov (Si-Me-On). I write this weekly blog about personal finance called CFO of Life to help you on your journey to becoming the CFO of your Life! I hope you like it and stick around for the long term!

Now, let’s get into the thick of it!

I might have told this story before but when I got to the UK (almost 10 years ago) I came with a few thousand pounds.

That was meant to last me at least 6 months, but 3 months into living in Newcastle, I had just ￡1,000 left. That’s when I had to ask myself, “Where did my money go?”

It was eye-opening, as the money I had saved over almost two years was gone in three months. And I wasn't just spending money for the sake of spending money; I was spending reasonably and enjoying the new city.

But I didn't take into account how much more expensive everything is. I didn't account for how much I would need to buy everything I needed for my house or how expensive everything is when you don't earn money.

It was shocking how quickly my money went away and how close I was to getting evicted from my accommodation. That would’ve also meant that I would’ve had to go back home, take my old job and suffer in silence without many prospects for the future.

But, that realisation pushed me to spend more time and look into my money, where it goes, why it goes there and if it was money well spent.

I hope you don't fall into this type of situation and don't have to ask yourself, “Where did all my money go?” But after today, you will be ready for when that moment comes.

I think this is self-explanatory, but it warrants the time and dedication to explain this.

Knowing where your money goes is essential, as this shows you what you get for your time.

Once you buy something, you exchange the time you spent earning the money for the thing you buy. Knowing where your money goes is super important, as you can't buy back time, but you can make money.

That’s my view, but I know plenty of people don't worry where their money goes. That’s fine as there is a point where you have enough not to worry about it.?

But if you don't know where your money goes, how would you even know you have enough?

There are 3 ways to track your spending and each one is increasingly involved.

The first one is The simple one:

Open your bank account at the beginning of each month, check your balance and write down the number.

When the month ends, take out your phone and check your balance. Once you know the difference between the beginning and the end balance, check if you are happy with the results, and that’s it!

Then you have The middle ground:

This one is a bit more involved as you would need to give each general spending category a “feeling”. Those can be good to have, should have, nice to have or a must-have.

From those, you can easily see what they mean, but each one of the “feelings” represents how much you need that purchase. For example, you must have your rent/mortgage paid as you need a roof over your head, but it’s good to have money to travel as that improves your life. In the same way, it’s nice to have money to spend on entertainment, but first, you must pay your car loans.

Now, this is an easy way to categorise where your money goes. In the next point, you will see why I like it and its power.

Before that, let me tell you about The perfect way to track your money:

This is how I track my money and it is more involved and time-consuming, but it does anything and everything; it covers anything you will ever need.

In essence, you must take every transaction and payment and give it both a category and a subcategory.

Example:

￡52.47 spent at Tesco (supermarket): I would categorise that towards “Food”, and then the sub-category would be “Groceries.”

In general, this is all you need to do for all your transactions. And that process itself is super laborious and precise. But thanks to it, I managed to save more than 35% of my income last year.If you like the sound of it and the dedication of the perfect way, you can learn more in my previous newsletter - CFO of Life #121

Now, it’s time to dive into the middle ground or spend a bit of time finding where my money goes.

As you might remember from the previous point, there are four “feelings” or categories: good, should, pleasant and must have. Those four categories should be self-explanatory. Still, I will go into detail about each one and what I put inside them. But don’t forget, this is just my opinion.

Must have - This is the category with all the necessities to have an everyday life and is critical for your survival and well-being. This includes rent/mortgage, food, water, healthcare, clothing and transport to and from work. In essence, this is the category that is fundamental to your survival.

Should have - This is the future-looking category, where you should add things to bring you a better future. Those include savings, investments, paying off debt, money towards education and anything else that would improve your future well-being.

Good to have - For activities that bring you joy and happiness and make your life worth living. This category usually encompasses anything and everything, including culture, travel, entertainment and fun. The category brings the highest return on investments and the best memories!

Nice to have - This category includes enjoyable but non-essential activities that enhance your quality of life. It’s the category to spoil yourself and to make your life a lot better. This is the spending category reserved for entertainment, dining out in swanky restaurants, gifts, luxury perfumes, aesthetic enhancements or designer clothes.

Another great thing about using this system is that it is super easy to find priority when the time for cutting costs comes. You can simply start from last to first, as when you need to tighten your purse, you will find the best value in doing so by reducing the luxury experiences, then the money towards entertainment and only then reducing your savings.

On the contrary, when you have the possibility to increase your expenses, you can always start from the bottom to the top. As usual, ￡1 more spent on travel and entertainment will bring you much more joy, happiness and pleasure than ￡1 spent on your mortgage.

I hope you see how simple, elegant and quick solutions can help you understand your finances. Money must not be complicated; it must be fun, exciting and pleasurable!

That’s why we will use and build on this concept next week. That would be Step 2 to mastering your money - the quick and easy budget anyone can manage!

Post #122 in the series CFO of Life #si #personalfinance #CFOofLife