Question Where are you spending too much money?
Answer Only you can answer that question.
Example: For one month, Adam’s (imaginary person) income was $3,600. Tracking his expenses revealed the following; housing $1,170, car $590, credit cards $525 and lifestyle $1,500.
|Credit Card Expense||$525||15|
Can you identify where Adam is spending too much money?
Complete Answer You have all the information needed to answer that question.
- You know how to calculate income for the month. (Post of July 18, 2016)
- You can track spending. (Post of August 15, 2016)
- You know what a typical spending plan (budget) should look like. (Post of Jul,y 25, 2016)
In the above example, Adam’s total expenses ($3,785) are greater than his total income ($3,600). Adam will eventually go bankrupt if he continues spending more than his income.
To identify where Adam is spending too much money let’s examine his spending.
- Housing Expenses which include mortgage/rent, utilities, cable/satellite/Internet service, cell phone, insurance, et cetera. Adam is spending 33% of his income. The recommended amount is 30% and may vary between 25% and 35%. Adam’s amount spent for housing is a little on the high side, but within the recommended amount.
- Car Expenses which includes car payments, gas and oil, maintenance and repairs, license plates, insurance, et cetera. Adam is spending 16% of his income. A little over the recommended amount, but close enough.
- Credit Card Expenses are in reality debt. Credit card debt will be address in a future post. For this example, we will assume it is debt pay down. Fifteen percent is within the recommended amount.
- Lifestyle Expenses could be classified as discretionary spending, which would include such things as dining out, clothing, entertainment, hobbies, vacations; all those things that that you enjoy and like. Adam is spending 42% of his income on lifestyle things. The recommended amount for lifestyle is 25%. Adam is spending too much money on lifestyle things.
Financial Literacy Knowledge/Skill
Identify where you are spending too much money.
Comments or Questions
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Next week’s topic: What’s the difference between needs and wants?