Start Tracking Your Money
A few years ago, my husband and I started running out of money before we ran out of weeks in the month. (Don’t you hate when that happens?)
This was embarrassing because I make my living advising people about money. What's more embarrassing? It took me months to realize what was happening. I kept transferring money from our savings to our checking when it was on fumes, thinking it was some sort of temporary aberration.
It wasn't, of course. Our income had dropped slightly and our expenses had crept up, but I hadn't registered the change or corrected course. Lots of people are in the same boat, thanks to stagnant or falling wages and rising living costs. But most people don't make the effort to track their spending.
Here's why it's important and the best way to go about it.
Before You Get Started...
This isn't about beating yourself up or bemoaning your mistakes. It's about getting a clear view of where you stand. Adopt the mindset of an explorer or scientist who delves into the unknown and hunts for insights.
Keep in mind that spending really is personal: No one else can dictate what you do with your money. There's no requirement that you limit your spending on X or that you spend a certain amount on Y. If you're part of a couple, you'll want to come to some agreements about your spending, but there isn't One Right Way.
You’ll Notice Patterns
To be clear: I'm not a fan of tracking every single penny spent and doing so forever. That's tedious, and for most people it’s unnecessary.
Closely tracking where your money goes for a few weeks, though, can be incredibly helpful. If you haven't done so before, chances are good you'll find a few shockers. For us, it was how much we spend on food, especially eating out, and the U-verse bill, which likes to climb into the stratosphere every time I look away.
Knowing how much you spend can help you avoid spending more than you make, of course. But it can also help you see where you're spending money on stuff that you don't really care about, at the expense of stuff that you'd rather have and do.
How to Track It
One of the easiest ways to start monitoring your transactions is with an online account aggregator such as Mint. You enter your financial account information and passwords; the site automatically downloads and categorizes your transactions. Mint can set you up with a preliminary budget, based on three months' spending history, that you can then tweak to suit your needs.
Another option is Quicken, which is owned by Intuit, the same company that offers Mint. Quicken has you download transactions to software that lives on your computer rather than in the cloud. As with Mint, transactions are automatically categorized and the software helps you create budgets.
Don't want to link your accounts? You Need A Budget requires you to manually enter transactions. It will take longer, granted, but the hands-on approach means you'll get intimately familiar with how you're spending your money, transaction by transaction.
Of course, you can always resort to old-school methods: gathering all your bank and credit card statements for recent months, along with every receipt you generated along the way, and entering the info in a notebook or spreadsheet.
Regardless of the method you use, you'll want to keep a running note (in your smartphone or notebook) listing all your cash transactions that aren't posted elsewhere.
What to Do With All This Info?
Analyzing three months' worth of data will give you a good idea of where your money is going, but even two weeks' worth of transactions can tell you a lot. Add up your expenses in each category. Some potential categories:
- Debt payments
- Child care
You can include other categories, of course, but try to avoid a "miscellaneous" or "cash" category, particularly if a lot of your money seems to get spent there. The key, once again, is knowing where your money is going.
You'll need an "income" category as well, to see how your outgoing compares to your incoming. Use your net pay and any other after-tax income that regularly comes your way. If your income is irregular, shoot for an average or (if you're more cautious) the minimum you expect to earn each month.
Once you have some totals, do a little math (or have the spreadsheet do it). What percentage of your total spending does each category represent? Are you comfortable with that? Does it reflect your values?
If you need to make adjustments (and you probably wouldn't be doing this if you didn't), start looking for places to redirect spending from what you don't really care about to what you do.
If you've cut discretionary expenses to the bone and still can't make ends meet, it could be because the big bills are out of whack. One recommendation: Keep "must have" expenses (shelter, food, utilities, insurance, minimum loan payments, child care) to 50 percent of your after-tax income. That's not a hard and fast rule, but doing so can help ensure you have money to save, pay down debt, and still live your life with a few comforts.
Liz Weston is an award-winning journalist and author of several money books, including the best-selling Your Credit Score. She writes about personal finance at her site, AskLizWeston. You can like her on Facebook and follow her on Twitter.