Are you underestimating your spending habits?

The most common financial planning mistake is people vastly underestimating their spending habits. Only a small percentage of people record and track expenditure and those who don’t, rarely have complete understanding of their expenditure.

The best way to work out what you actually spend, is to look at you net income for the year and subtract what you saved; the rest is your spending.  When most people look at that number they are shocked.

There will be extraordinary expenditure in that spending, but it is likely there will be next year as well!

Underestimating expenditure is a big problem for retirees and pre-retirees as all our planning centres on generating enough income to meet expenditure.  If the expenditure is wrong, we will incorrectly calculate the sum required to retire and how long retirement savings will last.

Underestimating expenditure also has consequences for wealth accumulators. It can lead to us believing we can afford higher loan repayments and over commit, we can be overly optimistic with our savings goals or be underinsured.

You are much more likely to achieve your financial goals if first of all you are aware of your spending habits and secondly in control of them. In the last few years there are a number of software programs that help to identify and track how much you spend and what you spend your money on.

Once you have identified what you are spending your money on, you are in a better position to determine what aspects of your spending you would like to continue or and those you’d like to reduce and develop a realistic budget.

One of the main reasons that budgets are so hard for many people is that they start with an unrealistic view of current spending; if you are starting position is more realistic, you are able to set more realistic goals.