Douglas A. Boneparth is a Westfield resident and Founder of Bone Fide Wealth, LLC, a boutique wealth management firm in New York City, and co-author of The Millennial Money Fix. Contact Douglas to learn how he’s not your parent’s financial advisor.
One of the most valuable things individuals can do to improve their finances is to know where their money is going. Most people can rattle off their big expenses like housing, transit, health insurance and daycare, but when it comes to intimately knowing your numbers, we usually have no idea what we’re spending our money on. Most of us simply don’t take the time to organize ourselves this way.
Experts will tell you that the greatest improvements to cash flow comes from adjustments made to the big expenses, but they’d be foolish to suggest that the smaller expenses don’t matter or should be ignored. While cutting back on smaller expenses like your morning bagel and cup of coffee may not free up cash like moving to a more affordable apartment or driving a less expensive car will, there’s immense value in understanding your spending data and, ultimately, your behavior.
Unfortunately, we are handicapped when it comes to uncovering truth in spending. How I wish there was a turnkey solution that could automatically categorize all of your expenses across all your accounts. Yes, many credit card companies and banks provide a lot of these details and programs like Mint or Tiller aggregate expense data across multiple accounts, but there’s nothing that I know of that’s fully automated, completely detailed and fully customizable.
Even when using some of the best financial tools available, it takes a lot of time to reconcile and categorize your expenses, especially at the very beginning when you’re just getting starting with the process. And I don’t only mean that it takes a lot of time to reconcile the expenses themselves, I also mean that a lot of time needs to elapse in order to collect enough data to meaningfully observe your behaviors. Quarter to quarter observations are good, but year to year is even better.
When it comes to personal finance, I am not a fan of taking shortcuts. I like to treat money management like I do my health. Because when you skimp on the details, the consequences can be multiple times larger than whatever short-term gain you’ve received for glossing them over. However, there’s a big difference between knowing your vitals and the fine details of your blood work just like there’s a big difference between knowing your average monthly lifestyle expense and a “to the penny” accounting of it.
At the very least, I want everyone to know what they spend on average each month. This is your nut. Relative to doing a line by line reconciliation of all your expenses, finding your nut by totaling your credit cards, payroll deductions and cash withdrawals each month doesn’t take nearly as much time. Moreover, the information is easy to obtain. If you take the extra step of separating out the large expenses from your monthly totals, you can get an more detailed picture of where your money is going without adding too much additional work.
Knowing your nut gives you just enough context to make informed decisions around your spending. Broadly speaking, it allows you to understand what you need to do, from a pure dollars perspective, to modify spending behaviors. It’s knowledge that can be transferred to the real world and gives you a reference point for understanding whether or not spending is getting out of control or if lifestyle creep is eroding increases in income. Most importantly, knowing your nut palaces you in control of your money, allowing you to be proactive instead of reactive.
For a society that’s often lost when it comes to their personal finances, gaining a North Star is invaluable to individuals trying to achieve something more than just living paycheck to paycheck. It serves as the starting point to living a more deliberate and purposeful financial life and it cracks the door open just enough to get a glimpse at what financial independence might look like. How empowering is that?
Last month, I had the opportunity to join Chelsea Fagan, the founder of The Financial Diet, on her massively popular YouTube series, “The Financial Confessions”. It was a huge honor to be invited to speak with Chelsea about all things personal finance. While I spent a ton of time on cash flow — thrilling, I know — I covered a number of topics ranging from the financial media to Dave Ramsey and the FIRE movement. I hope you’ll check it out.