Thursday, March 10, 2011

Financial Awareness

Why Financial Awareness Matters
Developing a sense of awareness about your finances is among the most important aspects of frugal living. I'd even go as far as to say that without such an awareness, it isn't even possible to live frugally. The point being that if you aren't conscious of where your money is going or how much you're spending, how do you know how much you're wasting and what to do about it? Financial awareness is important because it is the key to all financial progress, from a simple plan like forming a budget all the way up to saving for retirement, financial awareness plays an essential role in all financial planning. Mindless spending never left anyone sitting with extra money in their checking account at the end of the week. Conscious spending habits, however, leave plenty of frugal-minded people with extra money in their checking account at the end of the week. By conscious I don't mean being awake (it's pretty hard to spend money when you're sleeping) but I'm referring to being fully aware of your thought process, feelings and behavior when you are spending money.

I think I've made it pretty clear in previous posts that I'm a frugal living beginner. Coming from such a position, I have no issues with sharing my personal finance problems and analyzing them to find a solution. In this particular post, I will be addressing my lack of financial awareness in regards and discussing a method for developing conscious spending habits.

A Financial Awareness Realization
This past week, as I signed online to check my balance every morning, I realized that nearly every time I checked there was less money in the account than I had expected. I usually remembered most of what I purchased, so it wasn't drastically less money than I thought I had, but definitely enough to require some time spent remembering precisely where these funds went. Usually, after a minute or two of thought, I'd remember some small expenditures I forgot about. The ten to twenty dollars less I encountered in my account would be explained away by a forgotten stop a fast food restaurant, some snacks at the convenience store or too many trips to a couple of coffee shops. I wouldn't mind if this occurred once or twice a month in very small amounts, say five dollars or less. In this particular instance however, not only was this "where did my money go" scenario occurring daily, but upon adding up the this "lost" money I found I could have easily contributed it to a more useful purpose such as debt reduction, building savings or paying bills earlier than I had planned.

What bothered me specifically about this situation, was a total lack of organization and a display of absentmindedness on my part. It was one of those problems that could be easily resolved but is ignored and thus develops into a larger dilemma. I think a dirty dishes example is one that anyone can relate to. Here's the scenario. You finish eating lunch and put your dish in the sink. As you have somewhere to go and are in a bit of a rush, you think "I'll clean that dish later". Evening rolls around and after finishing your dinner, you feel exceptionally tired and you once again decide to simply put the dish in the sink and go to bed. You repeat this cycle for four to five days. You wake up on one of your off days and decide you're going to make yourself a wonderful breakfast. Once you open the cabinet in your kitchen and find you don't have any clean dishes, you take a look at the sink. The sink is full of dishes and you take twenty to forty five minutes washing them all wondering why you don't wash them right after eating a meal in the first place.

Unconscious spending undergoes a similar process. You spend a couple of days frittering away small amounts of money without checking you balance thinking "I still have a lot left, this is insignificant spending". Three or four days later you check your bank account and see your balance is at least thirty dollars less than the amount you expected to have. Suddenly you wish you actually kept track of your money as you spent it and knew exactly how much you had left over every time you made a purchase. It certainly seems like it would make your life easier.

Becoming Financially Aware
Now that the problem is clear, I'm going to offer a clear solution. As this issue is clearly based upon lack of financial awareness, I will demonstrate how to increase financial awareness. I need you to find a comfortable chair, close your eyes, begin breathing rhythmically and block out all mental images while focusing on a perception of financial awareness. You might even want to whisper the words "financial awareness" to yourself as a means of staying focused.

I'm kidding (though I do respect meditation practitioners) and just having fun with the idea of "awareness".

I have a practical, hands-on approach I plan on employing this week to develop some financial awareness. This week, when I check my bank account each morning, I'm going to take out a piece of paper and write down my checking account balance. I'll put this piece of paper in my pocket and take it with me as I go about my day. Anytime I purchase anything (yes, that includes a seventy five cent soda can) I will pull out this piece of paper and write down the amount I just spent. Before going to bed at night, I will subtract the amount I spent that day from the total balance I wrote in the morning and figure out my new total balance. I will then take out another sheet of paper and write the new total balance at the top of the sheet to use tomorrow. The next morning, I'll grab the paper with the total balance, put it in my pocket and repeat the aforementioned process.

Isn't this the same thing as that annoying checkbook I don't use?
There are some advantages to using this method versus say making a budget in the beginning of the week or keeping a more specific spending record like a checkbook. Often times when people make budgets, they plan out a specific amount for spending on-the-go. Due to the nature of on-the-go spending, often times that twenty dollars a week spending limit for on-the-go purchases is exceeded within two or three days of unconscious spending. Taking time to write down how much you're actually spending helps you stay within your budget goals with very little effort. The method I'm employing is basically the same as a spending record like a checkbook but slimmed down. Unlike a checkbook, I don't have to carry around a bulky, multi-page item. Also unlike the checkbook, I don't feel inclined to have to fill out any additional information. If you're like me, a page which has boxes for writing down dates, store names, check numbers, etc., makes you feel as if you must fill out all that information in order to be organized properly. Using my strategy, none of that is required. Simply write down the amount, and do the subtraction later, no need to worry about taking down the date, what store you're purchasing from and all of that. What truly matters, after all, is being aware that you are spending money.

Moving Forward
If I employ this strategy successfully, I am certain I will go from thinking "where did that money go" to knowing precisely where it went. More importantly, as I stated earlier, it is impossible to live frugally without financial awareness. By developing financial awareness, I will be able to move forward and employ other frugal methods. Each day I will know how much money I have, which will make it easier to spend that money more carefully, reduce wasteful spending and funnel what was once wasteful spending into worthy causes such as reducing debt and building savings.

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