Where Does All the Money Go?

by Brandon Jubar

The More You Make, the More You Spend

I'd always heard the old adage, "the more you make, the more you spend", but it didn't really sink-in until I took the job I have now. You see, in January of 2000, I accepted a promotion and went from being a second shift foreman on the shop floor, to being a white-collar desk-jockey in the ivory tower. Unfortunately, the substantial increase in base pay didn't even come near to making-up for the loss of overtime pay. The net result was a 20% decrease in my take-home dollars.

When evaluating the promotion, my wife and I had looked closely at our expenses and found that the new salary I would receive would be more than adequate to meet our needs. We wouldn't have anywhere near as much "discretionary income", but overall we'd be doing fine.

Three years and three raises later, we find ourselves examining our debt, carefully planning our resources, and wondering where all the money goes. It seems as though, no matter how hard we try, the best we ever do is break-even. The one saving grace is that, so far, we have not ended up with more month left at the end of the money!

The Devil is in the Details

Anyone who has ever attempted to get a handle on their personal finances has probably assumed that the object is to make sure your monthly expenses do not exceed your monthly income. This is a fairly safe assumption, yet it is really only part of the equation. It is my humble opinion that the devil is in the details... and that is where most of us run into trouble.

Most people, when they sit down to write out their "budget", end up with categories something like this:

Housing (mortgage payment & taxes, rent, etc.)
Housing (utilities)
Transportation (auto loan payment, insurance)
Transportation (gas)
Groceries
Credit card or other debt payments
Health Care
Other insurance
Retirement or other savings
Phone
Cable
Internet Access
Child support and/or alimony
Miscellaneous

Your monthly expense categories may be slightly different, but you get the idea. It's actually fairly easy to compile a list of your recurring expenses... and if you haven't done this already, it is a basic personal-finance requirement and you should do it soon.

Here I am going to focus on one category in particular. The one category that I believe causes a great deal of the financial difficulties in this country today. It is the category that silently siphons away our dollars, month after month, while tricking us into believing that we can actually afford that new bedroom set, or the monthly payment on that wave runner...

The category I will focus on today is "Miscellaneous".

Discretionary Income
OR
Money Thrown Down A Hole

The category that most of us call "Miscellaneous" usually refers to the dollars that Financial Planners call "Discretionary Income". It is the money that we don't have to pay to someone every month. It is the money that has not been earmarked for a mortgage payment, phone bill or auto loan payment. It is the money that is spent wherever we choose to spend it. Unfortunately, it is also the money that most people do not track very carefully.

Whenever we consider purchasing something new, the money must come from this discretionary pool. Though we may know how big this pool is, rarely do we understand how much of it we need in order to maintain the lifestyle we are accustomed to enjoying. It is easy to round-up all of the ATM receipts at the end of the month and total up the "cash" that you went through. It is much more difficult to determine where all of that money was actually spent.

A few years ago, I figured out how much money I was spending on coffee every day, and it blew my mind! Spending a dollar every day at the gas station on my way to work seemed harmless enough. Then I started tracking how much I was pumping into the vending machines at work -- an average of five cups a day at 40 cents a cup -- two more dollars a day. At that time I was working at least six days a week, so I was spending a minimum of $18 a week! Including holidays and vacation, I'm off work about four weeks per year, which means I was spending over $850 a year on coffee!

I promptly bought a nice thermos (which I just recently replaced) and began brewing my own coffee before I left the house each day. Now $18 supplies me with about two months worth of java rather than one week's worth -- and it tastes a whole lot better!
Unfortunately, the money I saved on coffee went right back into that discretionary income pool... and was promptly siphoned off by some other unidentified expenses. So, what does one do next?

An Eye-Opening Exercise

In order to get a good handle on your "discretionary income", I suggest you start tracking it. I have read different suggestions from different financial planners: everything from "start slow so you're not overwhelmed", to "track every last penny as soon as you spend it". From personal experience, I think a middle ground works best.

Carry a small, spiral-bound memo pad with you for two weeks. Whenever you purchase something with cash, ask for a receipt. If you cannot get a receipt, take a moment right then to jot down what you spent. (Yes, even the 75 cents you cough up for a bag of microwave popcorn from the vending machine.) At the end of each day, use your receipts to write down everything on which you spent money. Don't worry about categorizing, simply document everything.

IMPORTANT: Make sure you list specific items, too, not just the name of a store and a dollar amount!

At the end of the two weeks, compile your data. Take a look at everything. Are there certain things that you're buying regularly? Are you pumping lots of money into vending machines at work? (Maybe that's the source of those extra pounds, too!) What surprises you the most? Was there anything that you "knew", but never guessed the extent of how much you spent on it?

It is during this evaluation that you should categorize things. If there ends up being something that you must spend money on each week, such as paying to park your car, then it should be moved out of the "discretionary income" category and be labeled as a monthly expense. This is also an excellent way to uncover spending habits that you may have been unaware of. Much like my coffee example above, you may decide to implement some cost-saving measures based upon what you find! (Unlike my example, though, don't fail to account for the money that you save, or it may disappear on you as well.)

Next Steps

Keep in mind that two weeks of tracking your discretionary spending may not be a long enough period. Many people will spend money sporadically on items such as clothing, books and music, etc. The time period is up to you, but I suggest you do the exercise for at least fourteen days.

Use the data you collect to analyze your discretionary spending habits. Keep this information handy when deciding upon any future financing. That new dinette may seem like a great deal, and well within your means, until you really look at what you will have to give up in order to make the payments.

In knowing where your money is going, you are armed with the information you need to make good financial decisions. And you won't be left scratching your head saying, "Where does all the money go?"

Life Applications:

How do money matters affect your family relationships?

How well do you track your finances?

Identify three things that you can stop spending money on.

Copyright 2001, 2003 by Brandon Jubar 
All rights reserved.