The average household expenditure in the United States was $61,224 in 2018. Any sensible individual will assume that this figure comes down to the fact that the cost of living in this great nation is high.
But according to a study published on Springer, the high cost of living is not the primary determinant in household expenditures. In the United States, income is directly proportional to the expenses in the majority of households. This means that households that have higher incomes spend more than those who have lesser incomes.
Other factors that influence household expenditures include:
- Perception of the consumers in relation to unemployment
- Expected rise in incomes and inflation
- Taxes from the government
- Personal spending preference
- A sudden increase in wealth
Some areas of expenses are harder to control. Repaying federal student loans and mortgage fall into such category.
But fortunately, household expenditures are well within your powers to audit.
You don’t have to live a particular lifestyle to take control of your expenses at home. Making drastic changes is also not practical or sustainable.
The idea is to make slow changes in your everyday living so you can reduce your expenses. A direct result of this is that you will also save a lot of dollars in the process.
Where to Begin?
Auditing your expenses can be as simple as writing down your daily expenses in a notebook. But once you decide on this step, it pays to go a little farther than recording your daily expenditures.
If you are computer savvy, using a spreadsheet can help simplify the process. You can also use several apps that can be downloaded to your smartphone. One popular app that is a favorite for auditing expenses is Mint. It does not require a learning curve, is easy to use, and is extremely convenient as well. You can do a lot more than budgeting with such online finance apps. You open an account on the app, and you are ready to go. It is also free to download.
Another thing that you should consider while auditing is time. It is not something that you can complete while having a lunch break. Going through your income and expenditures for a month or so requires a good amount of time. You should have at least a couple of hours at hand to review everything with a critical eye.
It is also an activity that requires concentration and less distraction. If you have kids, you should do the auditing when they are at school or asleep. You also need to have a clear head and be in a good state of mind while auditing your expenses.
Gathering Information About Your Expenses
A lot of financial experts talk about gathering information about your income and expenses. But oddly enough, no one tells you where to procure this information.
Gathering information about your expenses sounds simple enough. But in reality, it is not. Most of us rely on credit cards to make purchases, whether online or in a physical store. But there are a number of purchases that are also paid with cash. So it can be tricky to keep track of all your expenses.
Fortunately, there are ways you can learn where every penny was spent in the last month.
Collect All Your Receipts
Irrespective of where you make your household purchases, the store will provide receipts. Since it contains all the information about the purchase, it is a great place to figure out how much you are spending.
After you collect the receipt, input the information on the spreadsheet or the app that you are using. Collecting receipts alone will not give you all your expenses history, but it is an excellent place to start.
Get Your Bank Statements
If you make purchases often using your cards, your bank’s statements are a goldmine of information. Here you will know exactly how much you are spending on your household every month.
Record all the information in the app or the spreadsheet as well. If you have the time and the inclination, recording your expenses for the last couple of months can be a great help as well.
A typical household expense includes the following categories.
- Rent or mortgage payment
- Gas and electricity
- Transportation, including paying for public transportation or using a car
- Tuition fees
- Hiring help, such as babysitters and tutors
- Medical bills
- Loans, including student loans, car loans, and credit card bills
- Gym memberships
- Expenses on food, including groceries and drinks
- Eating out and ordering takeaway
- Going out for movies and other entertainment
- Cell phone and internet bills
After you have gathered the information about your household finances, it is an excellent time to proceed to the next step.
Making the Review
The next important step in auditing your expenses is reviewing. For many auditors, this is the most challenging part of the process. It is because you need to review each expense with a critical eye. You need to be quite mechanical and objective while executing this step.
Here are our top recommendations for making the best audit.
Review Your Expenses
Reviewing your expenses is the first step before you get into the money. It is important to identify your spending habits and the areas that you can reduce it.
There are many areas where you are spending more than it is necessary. It can be anything for buying brands, eating out, making expensive purchases when you have not saved for it, and many more.
Some other ways that you may be overspending include hiring help when you could have solicited the help of a family member and subscribing to newsletters you don’t even read.
Another expense that is particular to Americans is food wastage. According to the US Department of Agriculture, up to 40 percent of food is wasted every year.
It is very likely that you can reduce the amount of money you spend in these areas. It may seem you cannot live without downing a bottle of wine every week or buying the hotly anticipated makeup that recently hit the market. But when you review these expenses with a different perspective, it will surprise you how little you actually need without compromising the quality of life.
Review Payments and Interest Rates
Another way your expenses hit the roof every month is the interest rate of your payments. Unbeknownst to you, financial institutions may be draining your hard-earned money.
The most common ways you are paying extra includes:
The average overdraft fee in the United States was $29 in 2017. According to one report, Americans paid $34.3 billion in overdraft fees in the same year.
What You Can Do
Sign up for low balance notifications and monitor your accounts closely. Opting out of overdraft charges is also a good idea.
The average ATM fee in the United States hit a 13 year high in 2018 at $2.90. This figure is even higher when withdrawals are processed from an out-of-network ATM.
What You Can Do
Avoid withdrawing from ATMs that are not of your bank. Install a fee-free ATM app on your phone if your bank has one. You can also withdraw funds in advance whenever you in the vicinity of your bank’s ATM. But do this only if you have reasonable control over your spending habits.
The majority of the banks have a cap on the number of transactions you can process in a month. After this number is crossed, you will be charged for every transaction. It can be anywhere from $3 to $25, depending on your bank.
What You Can Do
Keep a tab on the number of transactions that you process every week. Also, avoid using your savings account for paying bills and withdrawals.
For most people, student loans are the major money drainer in their finances. The situation is even worse for those who have loans from private lenders.
The average rate of increase in private student loans was 8.86%. This figure is even higher when it comes to a variable rate of interest.
What You Can Do
Consider refinancing loans so you can avail from low-interest rates. Additionally, if your income is steady, pay more than the minimum amount every month.
Review your Savings and Retirement Plans
Banks and financial institutions do not hold your money for free. It is important to know that charges are levied towards your savings and retirement plans as well.
While auditing your household expenses, reviewing this part of your finance can make a significant change.
Saving Account Charges
The annual percentage yield or APY of most savings accounts is about 0.01%. But it can also go up to 1.7% annually. It seems like a negligible amount. But over time, this can drain your savings.
Most of the banks also charge fees for maintaining a minimum balance on the account. When your account falls below this figure, you will be charged. Depending on your bank, you will end up paying anywhere from $5 to $25 every month for a basic savings account.
If your savings account comes with rewards, the charges can be significantly higher. The charges are also applicable for checking accounts as well.
What You Can Do
The most effective way is to make sure that the minimum balance is maintained. If your bank requires you to link your savings account to checking account, comply with the rules.
Also, sign up for low balance alerts, so you get notified as soon as your balance falls below the minimum balance.
If you have signed up for employee benefits, you can also incur unseen charges. The most common one is the 401(k) plan. The charges can be more if you have not rolled the old plan into the existing one. You will be paying for two plans, even without knowing.
What You Can Do
As soon as you know that you will be joining a 401(k) plan in the current company, make sure that you roll the old plan into the current one.
Making regular payments is also a great way to reduce penalty fees on your retirement plans.
Another surefire way to take control of your payments is to set up automated payments. This is a fantastic way to avoid bills and also reduce your stress as well.
Consider If You Need Additional Plans
Now that you have a clear idea of your financial potholes, it is a good idea to consider if you need additional plans.
Auditing does not only concern with reducing your expenses. Since you are taking the whole family into account, it is an excellent time to consider other members and their needs.
This can be anything from life-changing events, such as getting married, starting a family, and changing jobs, among others. These events can warrant procuring some form of insurance. For many families, it is life insurance.
It is also a great idea to make use of financial products or consult an expert. However, this step is recommended for those who have been in the game for a while, so go easy on yourself.
Keep in mind that any form of auditing requires time to master. So if you are just starting out on this journey towards financial freedom, don’t pressure yourself to become perfect overnight.
When to Conduct the Audit
As simple as it sounds, household expenses form a vital part of expenses for almost everyone. It is also an undertaking that requires time, and lots of it. So figuring out a good time for auditing can be challenging.
Setting aside time to conduct a monthly audit is the most feasible one for most people. This can seem impossible if you work full-time. However, if you are serious about getting hold of your finances, it is definitely a time well spent.
Setting up a specific date and time is usually an excellent place to start. For most people, weekends are a good time. But convenience is very subjective, so it’s best to figure out your own time.
As you slowly progress from the monthly audits, consider quarterly audits. To be fair, no one can whip their spending habits into shape in one month. A quarterly audit will help you identify the weak areas and where you can make improvements as well.
The beginning is always the hardest. But after a few months or so, it will become a habit, and you will be debt and stress-free in no time. This will make it much easier if you decide to add a yearly audit to your arsenal.
Best Apps for Auditing Expenses
There is always the option to use the traditional pen and paper. However, auditing the entire household is labor, time, and resource intensive. So it does not hurt to use apps that can make the job easier.
Some of the best apps for auditing are:
- Mint – This is a free budgeting tool. Here you can do everything from budgeting, keep track of bills and balances. An added advantage is that using the app improves your credit scores. Click here to sign up.
- YNAB – YNAB or You Need a Budget is one of the best budgeting tools on the market. It is a great way to have firm control over your finances and limit your spending. It is not free, but you can try it for 34 days absolutely free. Check out here.
- Quicken – You can view and pay bills, create a budget, manage your spending, keep track of your investments, and much more with this app. It is not a free app, but it has a number of pricing options. Compare the prices here.
- Personal Capital – It is another free app that comes with a lot of features. Track your investments and spending using this online finance tool. Link the app to your bank account and manage your finances like a pro. Click here to join.
- Tiller – It is a financial tool that works in tandem with Google Sheets. If you prefer working with spreadsheets, this may be the best tool for you. It is available for a free trial for a period of 30 days. Check out here.
What Else You Need to Know
Irrespective of your efforts, managing finances is always a tricky thing. Even the most seasoned auditor can make mistakes.
Some practical ways you can make auditing a resounding success are:
Don’t Make Any Drastic Changes
The key to financial success takes time. If you love going out with friends for lunch, consider cutting down the number of times you go out. Don’t eliminate it from your schedule completely.
If you make radical changes in your spending habits, you will not stick to your budget. You may even end up spending more to compensate for it. Apart from messing up your finances, it will make you miserable as well.
Increase Your Income
It is easy to tell someone to increase their income. But finding the time and the energy to manage a second job can be a challenge.
A side hustle can be a great way to supplement your income. But if you cannot, there are a number of ways you can make decent money by spending a few hours online.
At the risk of sounding repetitive, you need an abiding budget that will see you through your plans. Even if you have auditing skills to rival the guys on Wall Street, if you don’t have a budget, it will make no difference.
So whether it is budgeting your travel expenses, utilities, food, and personal expenses, it is paramount that you have a budget.
Get Your Partner on Board
If you are married or living with a partner, being on the same page is necessary. One of the leading causes of trouble with couples is having different views about finances.
It doesn’t matter if you cut all your expenses to the bare minimum. If your significant other does not have the same spending habits as you, all your efforts will be in vain. The situation can be exacerbated if the couple has children and pets in the household.
So to avoid misunderstandings and to make the best out of your finances, make sure your partner knows the financial journey that you have undertaken.
It’s Okay to Make Mistakes
If you are new to auditing and budgeting, it is a daunting task. You will make mistakes and end up spending more than anticipated. In the beginning, it can be challenging to cut back on expenses without feeling bad.
When you evaluate your finances, cut yourself some slack in the beginning. The important thing is to learn from your errors and make changes as you progress.
Getting caught up with the daily grind and the kids and pets, managing your finances can be overwhelming. Along with this, the steady flow of bills can become too much to handle. The situation can be worse if this is the first time you are undertaking the project.
However, it is essential to look at the bigger picture and stay focused. If you are consistent and make even little progress in the first year, it is a good sign. Within the first two years, increasing your savings is not the point. But if you are able to keep your expenses under control within the first year, pat yourself on the back.
Auditing your household expenses can seem very challenging at a glance. However, when you get down to it, it is very doable. The process is simplified further when you use online financial tools.
It is a great way to have a firm grasp on your finances. The end result is not only about saving a ton of money by auditing your expenses. But it is a way to live debt-free, enjoy the present, and also prepare for the future along the way.