Why its Critical to Record your Cost of Living

Seeing the big picture of your finances and the cost of living is absolutely key to improving your financial situation.  You can’t make decisions about money if you’re not clear where it’s going, and why.  Well, I guess you can, but you’ll be ill-informed.  The point of an expense breakout is to get the spotlight on the items that need to be eliminated, reduced, refinanced, etc.  Just like a business, we want to reduce costs and allow our money to work for us.  Here are a few examples of how reviewing your liabilities regularly can help you.

drawing pictures on an easel
Not a picture of me. But, I have whiteboards in my house. This was too perfect not to use.
Communication and Alignment

If you’re going through this process with a partner, getting these expenses on paper and letting the math speak for itself is a great way to get on the same page (pun intended).  My fiance is significantly more frugal than I am when it comes to spending.   However, I am more aggressive in saving and risk profile than she is.  So, it works out!  We go through our balance sheet together all the time, because it ensures we’re aligned on where our money goes.  Additionally, spending decisions become easier when we agree on the plan.  We both want to retire while we’re reasonably young, and having a reasonable cost of living is vital for us to achieve that goal.

Order of Operations

Everyone is different and in vastly different financial situations.  Maybe you have a lot of credit card debt or are considering bankruptcy.  You could be focusing on building an emergency fund or a real estate empire.  All of these situations paint a picture that a decision is on the horizon.  Regardless of where you are on the journey, do the work and record your costs.  Let the math guide you.  If you’ve never done this before, don’t worry.  I’ll share my personal costs of living in the next post.  We’re going to do it together anyway.  This is the way to see a reflection of your financial state of being.

If you’re in a place where you need to focus on paying down debt, there are a couple of well-known strategies to implement.  But, surprise, surprise!  They both need you to capture and track the liabilities.  These example methods give insight into why writing down your cost of living is so beneficial.

a very small snowman with twig armsSnowball Method

A process of listing all the debt payments you have starting with the smallest remaining balance to the highest.  Ignoring interest rates, you pay down that smallest item first.  Let’s call that “Account #1”.  While making minimum payments to the remaining accounts, you focus on Account #1 until its eliminated.  Once paid off, you move to the next liability, or “Account #2”.  However, when you start to pay Account #2, you add the payment you were making to Account#1.  You repeat this process until all the debt is eliminated on your balance sheet.  The great thing about the snowball method is you quickly see progress.  Check out David Ramsey’s blog for a deep dive of this strategy.

sign at the top of a snow covered cliff that reads "Caution Avalanche Danger"Avalanche Method

A focus on interest rates is the engine of the avalanche method.  Listing all liabilities by the highest interest rate first, you tackle the debt that costs you the most month-to-month.  Paying all other debts with the account minimum focuses all free cash to stop the bleeding as quickly as possible.  Once an account is paid off, you include that money on the next account and repeat until complete.

If your at the point where you’re moving past debt and focusing on retirement, the FIRE crowd tends to follow the retirement wrapper.  If your not familiar with FIRE, Financial Independence Retire Early, Investopedia has covered the basics.a picture of a heirchay of investment choices in order of emergency fund, match employer 401k, paying down high interest debt, maxing IRA, contributing to 401k, and finally taxable accounts

Retirement Wrapper

The retirement wrapper is a checklist of steps towards savings with efficiency and tax focus.  While it’s not about debt only, it does show that decisions of free cash are part of a bigger picture and strategy.  Once you’re at the point that most, or all your debts are gone, the retirement wrapper becomes a checkbox of priorities.

The Unknown

In my opinion, recording your cost of living creates knowledge and the peace of mind that comes with it.  It may be the most underrated reason to do it regularly.  Are you the kind of person that stresses about money?  Gain some confidence by seeing and understanding your situation. Ease your mind by making a plan to solve your problems.    Taking the time to write out your expenses removes the mystery of “where that money went”.

 

What Comes Next?

In my next post, I’ll share my personal yearly cost of living.  Hopefully, it can be used as a template for your own efforts.  Additionally, I’ll explain what I want to focus on improving, and why.  I hope the transparency is helpful, encouraging, and drives conversations for a healthy balance sheet.

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Dustin

Author of firein10.com Tracking my goal of achieving financial independence in 10 years.

2 thoughts on “Why its Critical to Record your Cost of Living

  • March 7, 2019 at 11:29 am
    Permalink

    I agree that you need to record your cost of living. It’s the first step of a budget. Having this information in hand will help you either increase or decrease your cost of living to help you save more. I’m with you, there is a peace of mind that comes when I have my finances in order. I don’t want to be controlled by money.

    Reply
    • March 7, 2019 at 2:47 pm
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      Improvements require measurements. Well said.

      Reply

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