Ask most people how much money they spent last year and they probably couldn’t give you an exact number. Yet most people know they want to spend “less” money. The first step in spending less money is knowing how much you currently spend. That’s why an annual spending review is such a powerful process.
An annual spending review involves looking at all your expenses for the past year from a bird’s eye view. You’ll look at how much money you spend on a set number of categories and identify areas of overspending. From there, you can take the necessary steps to save money in those areas. An annual spending review does take time – to gather the statements, sign up for the budgeting tool, and evaluate the expenses. If you set aside a couple of hours one day, you can complete this task. It’ll open your eyes to your spending habits and save you money in the long run.
Gather All Credit Card Statements For The Year
The first step is to gather all your credit card statements for the year. If you participate in online banking, you can simply download each month’s statement from your online account. You can also request paper statements from your bank or credit card issuer. At the end, you should have twelve statements for January through December – whether that be digital or paper.
Having this financial data handy will serve well in evaluating your overall spending habits for the year. Did you spend a lot more than you expected on gas? How much in total did you pay in interest on months when you didn’t pay your bill in full? This insight will help you evaluate areas for improvement moving forward.
Use A Budgeting Tool To Categorize Expenses
You can take things a step further and use a budgeting tool to categorize expenses. Simply sign up for a service like Mint or Personal Capital and link your accounts. You can link bank accounts as well as credit cards. Mint and Personal Capital automatically label your expenses with categories like travel, restaurants, entertainment, online services, etc. What’s great is that these services act retroactively. So you can sign up today and have your expenses for the entire year categorized. You can edit the categories as you see fit and add new categories as well. So you can really create an accurate picture of your expenses for the year.
Once you have all your expenses accurately categorized, you can search through and sort them. Take a look at how much you spent on each category for the year. Did you spend more money on restaurants than you did on groceries? Did you spend more on travel expenses throughout the year than you thought? Seeing a running list of all expenses in a given category can be very eye-opening.
Without a budgeting tool like Mint or Personal Capital, it would take hours to categorize all your expenses for the year, let alone do it precisely. Using such a budgeting tool is valuable in completing an annual spending review. You can even compare your numbers year after year and track your annual progress.
Identify Areas Of Overspending
As briefly mentioned above, a budgeting tool can help you identify areas of overspending. When you can see your annual spending in a given category, you can make a judgment on whether that amount is more than you would like to spend in a year on those expenses.
Overspending often happens without us knowing it. It happens across weeks and months and slowly adds up. Then, a year passes and you’ve realized you’ve spent hundreds or even thousands more than you thought you did on a certain category of expenses. My problem category is food. I spend way too much on takeout. Thirty dollars here and there doesn’t seem like much. But $30 every week for a year is over $1,500! That’s money that could’ve been put to much better use had I just decided to cook my meals at home instead.
What one person considers overspending could be completely appropriate for another person. That’s why it’s important to make sure you evaluate your annual spending in relation to your circumstances. For example, are you part of a busy two-income household with children? In this instance, occasional takeout may be necessary given your family’s schedule. Identify the areas of overspending that are realistic for you and your family to cut back on.
Make Money-Saving Changes
Once you’ve evaluated your annual spending and identified areas of overspending, it’s time to make a plan. What can you do to save money in those problem areas? For example, if your problem area is food, whether that’s takeout or restaurant dining, the solution is to cook more meals at home. You can do this by meal planning ahead of time. You can prepare for those days when you know you’ll be extra busy by preparing Crock-Pot meals that don’t require much attention. That’s just one example of a making money-saving change.
No matter what your area of overspending is, there are likely things you can do to cut back. You just need to be resourceful with your time and money.
Final Thoughts
Completing an annual spending review is a powerful procedure for your finances. Not only does it summarize how you’ve spend your money for the entire year, but it also opens your eyes to areas of overspending. By completing an annual spending review, you can effectively come up with a game plan for how to tackle your spending the following year.
If you have big goals like an going on an international trip or buying a home, this is the year to do an annual spending review. Identify areas where you can make money-saving changes and use that money saved to fund your goals.
Have YOU ever done an annual spending review? How did it help you save?
