Leakages and Budgeting
All of us have leakages in how we spend our money. It is very important that we identify these areas so we can either minimize or eliminate them in our system. How do you identify these leakages and transform them into savings?
First, you need to create your spending plan. Figure out your monthly net income and the areas where your money go. You may call these areas, spending areas or spending categories. Then take each area and sub-divide it into two more categories: required expenses and discretionary expenses. Required expenses need to be paid each month, such as groceries, amortization, etc. Discretionary expenses are your variable expenses, those you may control in some ways.
Second, identify how much you are actually spending on each spending category. You can get these information from receipts or listings of products and services that you paid for the previous months. Average the monthly expenses so you can get an idea of how much you can allocate for a particular category.
Third, compare your total spending with your total income and strive to reduce your expenses by spending a lot less for each category versus your average before. In this way, you either balance your spending with your income or spend less than what you earn.
So how do you identify your leakages. Most of the discretionary expenses are your leakages. Some of your required expenses will also show leakages. Here’s an example when I did this exercise:
For my transportation expenses, fuel is classified a required expense. But through time, understanding how I drive and and go around town let me understand where the leakages were. Today, I do not go above 60 kilometers per hour. I also plan my route to accomodate most errands.
For the same spending category, a discretionary type of expense is parking fees. Now, I strive to walk going to particular places, particularly if these destinations are near my office, which has free parking.
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