Now that you have set your goals the next step is to track your expenses so can you see where you are spending your money, because until you know where your money is going, you won’t be able to stop it from going there.
There are two ways to track your expenses. One way is fast but hard; The other is slow but easy. The choice is yours. The fast/hard way is to spend a weekend going backward in your checkbook and through your credit card statements for the past six months. It’s hard, because you’ll work all weekend, and you’ll have gaps, particularly regarding the cash you spent, but by Sunday night you’ll be ready to go to the next step.
The other way is slow/easy, and here you start to track all your expenses for the next six months. It’s very easy to do, for you just record expenses as they occur. It takes very little effort, but it’s slow: It’ll take you six months to complete the process. The choice is yours. For simplicity sake I am assuming that readers will go for the fast and hard method.
There are many different software programs like Quicken and Microsoft Money which will help track all of your expenses, or you can do it the old fashioned way using a pencil and a pad of lined paper.
One thing you will find when reviewing your bank statements is that to effectively track your spending, your need a paper trail for each expense. ATM receipts do not leave a paper trail of where your money went. Thus going forward you should use checks and debit cards as much as possible so that you can have a record of each transaction.
Starting with your first bank statement enter who you wrote each check too and the dollar amount of the check. Now assign a spending category, like Food, Utilities, Auto, for each expenditure. It does not matter what the categories are, as long as they are meaningful to you, and that you use the category consistently. For example, some people will list money spent on dinner at a restaurant as Food, while others might classify it as Entertainment or Dining Out. The choice is yours; Just make sure you are consistent with where you place the expense. Also try to insure that each category is not so broad it is used too often nor so limited that it is seldom used. For example, Clothing is fine, but creating three categories — Clothing-His, Clothing-Hers, and Clothing-Kids might enable you to determine more easily where the money is really going.
At the end of each month you will get a total showing your total spending for the month, as well as how much you spent in each category. The next step is to convert the dollars into percentages, so you can see what percentage of your total spending occurred in each category.
When most people see this information for the first time they are shocked about how they are spending their money. Many find they are spending incredibly high percentages of their income on non-essential things. By understanding where their money is going, they are able to make better decision on what to spend their money on. Until you go through this process, you won’t know whether the amount you’re spending in a given area is too much or too little.
Click here for help on turning those pennies you saved into dollars.
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