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How a Data-Driven Approach Can Improve Your Finances

Man in grey t-shirt holding empty wallet

If you have set yourself the goal of improving how you manage your finances, it may help to use techniques employed in data analytics and data science.

Using an approach of defining your goals, measuring your income and expenses, analysing the data and improving your finance is a brilliant way to break your finances down into manageable and actionable pieces. 

While it is always tempting to splurge some cash on the day you get paid, you can end up in a negative cycle of counting the days until your next payday. You might get some level of enjoyment from this, as you can invest in luxuries or nights out, but you will struggle to reach long-term financial security without properly taking control of your money. 

By taking a close look at your finances through data collection and analysis, you will be able to break this cycle. Ultimately, this will help you achieve a more secure and sustainable way of life, allowing you to get closer to saving for your dream holiday, a house, or ridding yourself of debts. Here are some ways that you can apply a data-driven approach to taking control of your finances. 

Define Your Expenses and Goals

The first step to improving your finances is to define the fixed expenses that you must pay each month. This will give you a bigger picture of how much non-negotiable money you are paying out of each paycheck you receive. These fixed expenses will include any direct debits you need to pay, standing orders, rent/mortgage payments, utility bills, council tax, insurance and debt payments.  

Once you have calculated the value of your fixed expenses, you can then deduct this from the amount of money you take home each month. The remaining sum is your disposable income. Your disposable income is all of the money you have to spend on luxuries, nights out, or to invest in your future goals and plans. 

To determine how much you think you will need to set aside each month, it can be helpful to put together a list in which you detail all of your financial goals. You can break this list down into short, medium and long-term goals. For example, a short-term goal might be to save for your dream holiday, whereas you may be looking to buy your first home in the medium term. Your long-term goals could be something as distant as retiring to a tropical island. 

Measure Your Expenses

Your fixed expenses are not the only things you will be spending your money on between paychecks. Your running expenses are more difficult to keep track of, but you will need to monitor these to understand your spending habits better. These expenses will include the money that you have to spend each month to live. Therefore, things like food shopping or household cleaning items will need to be tracked. 

When measuring and breaking down your running expenses, it is essential that you keep receipts rather than relying on bank statements alone. These will help you to develop a more informative picture of where your money is going. 

Analyse Your Finances

The steps above detail how you can begin to collect data on your monthly spending and general finances. Once you have received your paycheck, it is time to start data analysis and management of your money. 

The good news is that you don’t need to be a data analyst to understand your finances better, but unfortunately, you will need to spend a bit of time on this step to get the most from it. It could be beneficial to invest in a data analysis and management course to improve your efficiency and understanding of the analysis step. A data analytics course will teach you some of the fundamental aspects of data science, which you can apply to your finances. 

When you get paid, it is good to dig out all of your running expense receipts for the month and spend some time categorising them. This way, you will develop a picture of how much you spent on essential items like food and contrast this to how much you paid for non-essential things like takeaways.  

This categorisation will allow you to recognise the areas where your money is disappearing. It will also help you identify which expenses you are willing to compromise on and those you are not. This is a personal choice, as what is necessary for one person will not be the same for someone else. It may be the case that your gym membership is non-negotiable, but you could be willing to cut your spending on nights out. Therefore, what you prioritise is entirely down to you and the goals you have set. 

After categorising and analysing, you can see how much money you have left to set aside for your goals and dreams. While this may not be a significant sum at the moment, don’t feel too downtrodden. Just the step you have taken towards financial self-awareness and independence is a significant one. 

Improve Your Spending in Line With Your Goals

So, you have figured out what you would like to do in the future, and you now have a good idea of where your money is going and your running expenses. The next step is to use the data you have collected and analysed to build towards your goal of financial security. 

This is, without a doubt, one of the most challenging aspects of realising your dreams and goals. Lapses in fortitude are inevitable, and sometimes it is necessary to go out for a nice meal or to have a fun night out with your friends. However, it is essential not to lose too much hope if this happens. 

When attempting to improve your spending habits, it can be helpful to remind yourself of your financial goals. You could do this by writing them on posters or sticking your financial plan somewhere you often pass (like your fridge or a mirror). Additionally, to stay motivated, it can be beneficial to think of it more like a fun challenge to yourself rather than a tedious chore. 

Another way to improve your motivation for saving for your dreams is to make a more regular habit of tallying up your expenses. If, for example, you were to calculate your running expenses weekly rather than monthly, you would develop a better week-to-week understanding of your spending habits. Using this method, you can see when you go under or over budget during the course of a week, allowing you to alter your spending habits for the remainder of the month. 

The Takeaway

Overall, improving your finances and security by analysing your income and spending habits is a slow and gradual process. It takes time and effort to develop a detailed understanding of data, although this can be accelerated through a data analysis course. Therefore, it is crucial not to lose faith in the process as you work on your financial security and self-awareness. You will undoubtedly hit roadblocks such as unnecessary spending or unexpected expenses during your journey. However, your understanding of your habits, income and expenses will allow you to respond to these more effectively. It is a process of refinement and growth, so by breaking your financial goals down into manageable pieces, you can take steps towards financial freedom. 

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