Spending What You Think?

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Every year at Sente Mortgage, we do an enlightening and sometimes even surprising financial-planning exercise. It’s very simple: First, write down the amount you think you spend each month, on average — including checks, cash and credit card spending. Don’t look anything up – go with your gut. Just guess, and write the number on the front of this card.

Now total up your actual spending for the past month, regardless of categories. (You can use your online banking and credit card statements to help.) Write these numbers down too.

How does your guess compare with reality? Every year, we find that 90% of the time people underestimate their actual spending. Generally we justify this difference by citing a one-time expense.

Now do this same exercise for the last 3 months, or even 6 months. Because one-time expenses can derail a month, you’re likely to find that what you think you spend is consistently less than reality.

What I’ve discovered is that those who underestimate their expenses tend to overspend by a similar amount each month. However accurate your guess turned out to be, getting it closer to reality will help you manage your finances better.

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