Don’t tell me where your priorities are. Show me where you spend your money and I’ll tell you what they are.
– James W. Frick
I had created “The Perfect Budget”; categories where I wanted to spend my money and dollar amounts for each category. No matter how much I tried though I always, always failed to meet my budget. I just couldn’t get a handle on my spending, how many ever times I changed and tweaked my budget. I always ended up waiting anxiously for my paychecks to pay the bills.
I created this perfect budget and kept wondering why it wasn’t working especially since everyone said budgeting should work! I wanted to spend more on organic produce. My budget said, I should be able to do this without a problem. But I didn’t have the money in my bank account. Where did all my money go? My spending was totally out of control. Well, I set myself up perfectly for failure. I came up with this budget based on what I imagined my spending habits were which was far removed from my real spending habits. Whether you are a fan of Dave Ramsey or listen to Suze Orman advice or have read every personal finance book in the world, without this simple piece of the puzzle it is impossible to get ahead.
If there is one idea that absolutely changed my whole perspective on how I spend/save money, its this – know where your money goes. It is the simple mirror I needed to show me what my spending habits really were, not what I “thought” they were. The results were a revelation. It showed me that my “produce” money transformed into that shoe I bought during my last shopping trip, the trip I took just because I was bored to stay home one evening!
What do I mean by know where your money goes? Simply track every penny you earn and spend. It sounds hard, but try it for 2 weeks, it will be a lot easier and the results will be startling. There are a few ways of doing it. You could use your past transactions to figure it out (if you are a credit card user) or log your expenses for a few weeks to gather the data (if you are a cash user).
Tracking based on past expenses : If you are comfortable with one of the online finance aggregation software (Yodlee, Mint, Due,…) or desktop finance software (GNUCash or Quicken) you can download the previous couple of months worth of transactions and start right away. The software programs usually categorizes most of the purchases. Look over them and correct the incorrectly categorized transactions. If you are concerned about the security of these programs, you could simply download your past few statements and use Excel to work with them. Create a few meaningful categories (groceries, utilities, entertainment, education, mortgage/rent, insurance, charity, personal gifts, eating out, magazines, clothing and gas) to start with and assign a category to each and every transaction.
Tracking based on future expenses: Keep a daily expense log for the next month or two. A daily expense log could be anything, a small memo notebook, an index card for each day, a PDA or a checkbook register. The most important thing is to “use” the log. Write everything down, from the $1 vending machine coffee to the $1000 Prada bag.
Another convenient way to do this to save ALL the receipts. If you don’t get a receipt, note the amount and the purchase on a small piece of paper and stash it in an envelope/wallet. Every weekend spend a few minutes entering these in an Excel spreadsheet and classify each of them into categories. Then throw away the receipts if they are not useful for any expense reimbursement or tax purpose.
This data tells you exactly what your spending habits are. It gives you a sense of power, an “aha” moment. Now that you are aware of what your money drains are, you can optimize the category that gives you no pleasure and use that money on something that is important to you!