“Where does all my money go?” Assuming you are not near or below the poverty line, chances are you have at some point looked at your annual income and asked yourself this question. I ran into this question after my first year working as a professional. There was nothing extravagant I had purchased, despite my much higher income, but I was spending on autopilot. I knew there was no reason I shouldn’t be able to answer this question with precision and embarked on a journey to spend my income with intention. Having a plan for my income has made a world of difference. Understanding where your money goes is the first step to achieving financial wellness and ultimately financial freedom. Most people focus on cutting costs, limiting your lattes and shopping trips without taking a holistic view of their money. There is a huge focus on cutting expenses to grow wealth. But instead of budgeting on the back end let’s start at the front end by managing our income as it comes in not as it goes out.
Be intentional from the start
There is not much you can do after you have made a purchase, which is why we hate tracking our expenses. It leaves us feeling guilty, confused, and depleted. If you have ever filled an expense tracker you have probably experienced these feelings. They don’t motivate us to spend less and set no clear path for optimizing spending in the future. The power lies in making decisions before the income hits your bank account. This requires us to get intentional about where we want to spend our money. Here are 5 ways to be intentional with the money you make so you can maximize your financial power.
Understand your recurring expenses
To take a look forward we have to take a look back. Lets take a look at our common bills and expenses but not with the purpose of cutting out but rather understanding and planning. Start by looking at your paycheck, as some of these expenses are taken directly from your employer. Here are the three most common expenses. If you want a deeper look, consider this post.
Fixed expenses
These are the expenses we have that are 100% necessary and usually are consistent and predictable every month. Things like rent/mortgage, insurances, childcare, etc. I like to think of these items as the necessary expenses to keep making money. If I want to work, I need a safe place to sleep, eat, etc. so I need a home and utilities. We are getting to the bare bone of things here. Don’t worry the fun gets added back in later 🙂
Future expenses
These are expenses that are funding what I call “future” you. Things like retirement, savings, emergency funds, etc. These are expenses future you will be using. Since we cant know exactly what items the future will bring these are more generalized vs itemized.
Flex expenses
Once you have itemized the two items above the difference between your future and fixed expenses will be your flex expenses. Don’t worry about tracking these individual for now but just know they most likely fit into a mixture of these categories:
- Dining
- Entertainment
- Gifts
- Books
- Hobbies
- Children’s activities
- Subscriptions
- Pets
Calculate the total amount and document it. This spreadsheet will help you crush this exercise. You should end up with a table that is similar to this:
By looking at buckets rather than single expenses we can properly plan and make sure we are being intentional with our income. This first step is usually the hardest and very likely to have you feeling a little drained. So if that is you, know that is totally normal and you are exactly where you are supposed to be. The next steps is where the magic happens!
Be intentional with your savings
There is a saying that goes “money burns a hole in one’s pocket” which refers to people who spend money as soon as it comes in their possession, or pocket. This is true for many people living paycheck to paycheck. While there are psychological reasons why people can’t stand to save a buck, let’s focus on the root cause. If the money never lands in your pocket, or in modern terms your regular checking account, then it becomes a lot harder to spend it.
This is why I highly recommend automating a deposit of 20% of your take home pay to a savings account. The savings account is the modern-day piggy bank. Ideally, this is done directly from your paycheck through human resources. But if that proves difficult setup automatic transfers between your accounts for this to happen as soon as your paycheck is deposited.
If 20% seems high, start with what you can. In 3 months check your account and you will be surprised how much is in there and you probably didn’t even feel it in your day to day life, once this happens work your way up to the goal of 20%. As humans we consume based the path of least resistance. This applies to food and media as much as it does to money. Take the proactive approach and work with your tendencies rather than against them by automating a set amount of money to be deposited into your savings versus checking.
Write future goals
Whatever your view around money is one thing is certain, money is a tool. It is used to create things, specifically, you use it to create the life you want to live. If you want a safe home you use money as a tool to purchase or rent said home. If you want to look attractive you use money as a tool to purchase clothes and shoes to your liking. Understanding how you want this tool to design your life can be the strongest motivator in achieving your financial goals.
- Start by writing three long-term goals. If you need help setting goals check out this post.
- Estimate how much money each of these goals require. I say this with certainty because 99% of your goals require monetary investment.
- Now, back-calculate the amount you need to save monthly to reach your goal in said timeline.
- Make a plan to set aside that money automatically today, and if you can’t afford it right now set a plan for cutting expenses or better yet increasing your income to make this happen.
The simple exercise of writing your goals on paper is already a way of taking ACTION on your goals. In your head, your goals and dreams are just thoughts and ideas. But on paper they are real, they are alive, you can see them! You are not only setting an intention about achieving them but taking action no matter how small.
Reflect on whether your expenses line up with your goals
Now that you have completed step 4 go back to step 1 and highlight all the expenses that align with your goals. Ask yourself honestly:
Of the expenses listed what percentage did you highlight? Reflect on this number.
Are you using this tool (your money) to build the life you want to live?
If not, take a close look at your expenses and see what adjustments you can make to fund your goals. Then, of course, automate those goals.
For me, I have a goal to take all-inclusive vacations every year. This meant I created a separate account and named it my “Travel” fund. The beauty in this is that every time I want to go on vacation I already have my budget created and don’t have to worry about the expense. I don’t have to put it on credit and pay later with stress and bills. By being intentional with my income and saving on the front end, I can use money as the tool that builds this goal into reality. Not the roadblock that is going to stop me from taking the vacation I want. This is a perfect exercise to make sure you are not trying to keep up with the Joneses but instead spending with intention on the things that matter to you.
Seek feedback from people you admire
It is truly unfortunate that money is so taboo. We are not taught about it in school and chances are your parents probably didn’t sit you down to teach it either. But there is at least one person you know that has at least a 1% higher success than you, financially. Seek these people and reach out.
Start by stating what you admire or noticed they did well financially. Ask if they wouldn’t mind sharing their personal finance strategy. You would be surprised by how much they are willing to share and help you. Since I started my career I have asked personal finance questions of all my managers. Why, because I know they make more money than me and I wanna know how to make more money LOL. But also, knowing how they spend it will give me insight into how these higher earners use money as a tool. Then I can evaluate if I want to match that idea or not (part of the reflection step above).
One thing I have learned in my financial journey is that it’s not the amount of money one earns but rather how intentional they are with that money that creates (or destroys) their happiness. By seeking mentors we can not only believe in ourselves and the next step but also gain clarity to build the path that will lead us to our goals.
Be intentional every step of the way
So the next time you ask yourself “Where did all my money go?” take an hour to complete these exercises. I promise in a few months you will not only know that answer it will be one you are proud and excited about. Being intentional with your income is about so much more than money, it’s about creating the life of your dreams. As your income grows and your life evolves, your finances will also. It’s important to come back to these intentions frequently but at least once a year. To be intentional is not a one-time decision, it is a practice, and the more you do it the better results you will achieve.
Try these exercises today and let us know what was most shocking to you in the comments below.