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Having financial confidence doesn’t happen overnight — it happens through knowing where your money is going and being willing to adjust your habits if needed. Therefore, one of the best things you can do with your time is to take a thoughtful look at your spending so you can prioritize it. Here are 5 steps for how to do so:

Understand money coming in vs money going out

The first step towards getting a full picture of your spending is understanding where your income is going. This takes some background work, but it’s an extremely valuable exercise. Set aside time to go through your past three bank statements. Use highlighters to color code expenses: one color for housing expenses, another for food (you could use two colors for groceries and eating out), another for car costs, etc. 

This exercise can cause people to react with feelings of shock, shame, or guilt. Let go of what has happened in the past! See this as a starting point and a way to move forward with new knowledge to help you make future decisions. 

Start by taking one month at a time, and wait until all three months have been reviewed before attempting to create your spending “snapshot.” Once you’ve gone through your bank statements, you’re ready for the next step. 

Identify your “four wall” expenses and other primary expenses

We echo Dave Ramsey’s advice to concentrate on your four walls first. The “four wall” approach addresses costs related to your greatest needs: the items you have to pay for in order for you and your family to live somewhat comfortably. For most people, this includes food and expenses related to your home like rent/mortgage, utilities and renters or mortgage insurance (if it’s not inlcuded in your mortgage). Other primary expenses are expenses related to transportation (like your car note, gas and car insurance), medical expenses (like co-pays and prescriptions), and clothing. 

Form a debt payment plan

According to an article on CNBC, “only 50% of Americans say they can cover expenses and bills with no difficulty in a typical month. Nearly 8 in 10 carry some kind of debt; 37% feel that they have too much debt.”

Debt is an unfortunate reality for many of us — but ignoring it is the worst thing to do. We recommend you first begin paying the minimum balance on all of your bills every month. Next, create a strategy where you concentrate on paying off one bill at a time. Say you pay $500 a month towards $2,000 worth of debt from purchasing a laptop. Once four months have passed, put that $500 towards another bill. 

Establish an emergency fund

Are you contributing to an emergency fund every month? If not, it’s time to establish one. There are times in our personal lives and in our world when emergencies happen, so this is an area worth prioritizing. Create a habit of putting money into your emergency fund, even if it’s only $5 a week. Remember: it’s not about the amount, it’s about taking that action step.

If you save $25 a week, you have $100 at the end of the month, and end the year with an emergency fund of $1200 a year. You will never regret having set this money aside as it helps you have peace of mind knowing there is some sort of cushion there.

Review and adjust your spending habits

Now that you’ve taken a long hard look at your spending habits, it’s time to consider what you can control within these expenses. First, review everything you highlighted that falls under the “four walls” category. There are a lot of ways you can adjust your spending, even on those necessary items. Are you spending a lot on utilities? Start practicing environmentally friendly habits and shop around for better rates. Negotiate with your cable provider or consider switching to a streaming service. If you are having difficulty paying a medical bill, ask to speak with the billing department of your doctor’s office. Many medical offices will set you up with a payment plan.

Another easy area to save on is the food category. Evaluate the food items that you end up throwing away at the end of the week. Try “no meat Mondays” or save costly protein purchases for special occasions. Check your master shopping list of pantry items and household items you like to have on hand so that you’re limiting shopping trips. Use items you already have in the fridge, freezer, and pantry to help form a budget-friendly meal plan. Take a look at Pinterest or other resources to see how you can eat for less. (We love this series on how a food blogger ate on under $4.50 a day for a month!)

Are you ready to become financially empowered by evaluating your spending habits? We know you can do it! 

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