This is part two of my eight-part series on how you can beat the banks at their game and get yourself out of debt.

Do you know the difference between essential and non-essential expenses? Honestly? I see so many clients who struggle to save money, yet always have enough to eat out, pay for Foxtel and spend weekends away. They have blurred the distinction between lifestyle spending and spending to live.

People in this predicament usually do not know how to manage their P&L – their profit and loss. In accounting speak:

Income – Expenses = Profit/Loss.

If you have a profit by the year’s end, congratulations! Your expenses are less than your income and you are living within your means. If you have a loss by the year’s end, you are living above your means. Your lifestyle exceeds your income. That’s not good!

Often, people’s expenses are just slightly higher than their disposable income – about 5%. So if your disposable income is $100,000, you will have a $5000 loss by the year’s end. In isolation, this deficiency is not too significant. However, if it occurs year after year, your loss will accumulate to tens of thousands of dollars – $50,000 in 10 years.

People often make unwise decisions when faced with their yearly loss. Instead of changing their spending beliefs and making different choices, they redraw their home loan or use credit cards. Their credit card debt snowballs and they may need to refinance their home every two to three years. Their debt basically finances their lifestyle. But at some point, the debt needs to be repaid.

So how do you stop running at a loss?

You must know the difference between essential and non-essential expenses.

In a nutshell, non-essential expenses are luxuries that aren’t required for survival: holidays, designer clothes, concert tickets, magazines, treats. Essential expenses are vital to meeting core needs: rent/mortgage, food, car, home insurance, utilities, electricity.

When I have a budget session with my clients, we go through their expenses and determine what is essential and non-essential. Outings, cello classes and cleaners are all expenses they feel they can’t live without. Trying to get my clients to let go of non-essential expenses is a bit like extracting teeth! Lifestyle spending is pleasurable. But the pleasure is short term, and the Consumerholic mindset leaves us wanting more.

Non-essential spending can have a significant impact on your life. Ask yourself, “Do I fail to save money? Do I run at a loss year after year? Am I struggling with credit card debt?”

If you answered yes, your spending beliefs need a shake-up. It’s time to practice resourceful habits.

Go through your spending and distinguish between what is essential and non-essential. Every time you go to spend money on something, ask yourself, “Do I really need this? Or is it an unnecessary expense?” You may not like the answer. But knowing gives you the power to make an informed decision.

Managing your P&L doesn’t mean you aren’t able to enjoy your money. It’s about understanding what is truly important to you and getting rid of the rest. It’s about making the conscious choice to say no to non-essential spending. It’s about building your wealth and stopping the cycle of debt.

Download the first three chapters here: 

Stay tuned next week for Part 3: Challenge Your Money Beliefs and Habits.


Susan Wahhab —CPA, SMSF Specialist, Entrepreneur, Working Mum, Small Business Supporter—     is Australia’s leading Financial Strategist and Money Mentor. Susan is the founder and managing director of Accounting and Financial Services firm Winner Partnership Pty Ltd  

Susan is the author of the transformational and practical book Money Intelligence® - Anchored in Values. She believes that people can become financially liberated by developing a healthy relationship with money. Learn more about being money intelligent