Track your expenses. You've got to determine 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.
I want you to track your expenses so that you can see how you are spending your money. I am convinced that once you see how you are spending your money, you will quickly and easily fix the areas that need improvement. And you'll be able to do all this without having to create -- or live with -- a budget.
Forget about budgeting, for you won't do it even if I tell you to. There's probably nothing more tedious, or less effective, because budgets only reflect how you think you'll spend your money, not how you really do spend your money. After all, how often does life go according to plan? So forget the dreaded "B" word.
See? There's good news after all!
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.
PC or No PC
If you have a computer, you can do this with Quicken, Managing Your Money, Microsoft Money, or any similar software package. You also can use a spreadsheet program such as Excel or Lotus. This is not an excuse to buy a personal computer, nor does it dismiss those who don't have one. Tracking expenses is just as easy with an ordinary pencil and paper, so don't think you need to spend two grand on a PC to get started, or that you can't get started because you don't have a PC.
If you have a PC, follow the instructions provided by the software. I'll explain how to do it here for those using paper, which is how my wife Jean and I did it when we started to get our financial life in shape.
But first, starting now, you may no longer spend cash. To effectively track spending, your money must leave a paper trail, and cash leaves no trail. Therefore, you must use checks and credit cards only. I'll talk more about how to properly use credit cards later in this chapter.
To begin, draw on your paper a series of columns (you'll probably need 20 or so, maybe more).
In the first column, list to whom you wrote each check. In the next column, write down the dollar amount of the check. For each of the next 20 columns (or more if needed), assign a spending category -- one each for FOOD, CLOTHES, AUTO, UTILITIES, and as many other categories as you wish. Then list the amount shown in column two under the appropriate category.
For example, say you spent $157.99 at the grocery store. In the first column, you'd write the name of the store. In the second column, you'd write "$157.99" and then you'd move to the FOOD column, where you'd again write "$157.99." See Figure 1
I don't care what your categories are, provided that each is meaningful to you, and that you use the category consistently. For example, where will you show money spent on dinners at restaurants? Will you list it under FOOD or ENTERTAINMENT, or perhaps DINING OUT or something else? For some people, UTILITIES is sufficient, while others set separate categories for TELEPHONE, ELECTRICITY, WATER, and GAS.
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-HIM, CLOTHING-HER, and CLOTHING-KIDS might enable you to determine more easily where the money is really going. But I once had a client who showed a category of "Clothes, William, Socks, Blue." Another client not only listed ENTERTAINMENT, she showed the name of the movie, gave a review, and listed that she bought a KitKat and Junior Mints. Both of these people are a little nuts.
Okay, they're a lot nuts. Don't go crazy with this. Just make sure your categories make sense to normal people. There is a list of categories in Figure 2 to help you get started.
What to Do When an Expense Extends to More Than One Category
Often, you'll need to itemize your spending. Say you spend $300 at a department store, buying a variety of items. Write the name of the store in column one, "$300" in column two, then split the total among the various categories appropriately. See the example in
Figure 3.
Do this for all your spending each month, and then total each column at the bottom. This will show you not only your total spending for the month, but how much you spent in each category.
Once you have produced dollar totals for each column, you need to convert the dollars to percentages, so you can see what percentage of your total spending occurred in each category. To do this, divide each column's dollar total into the total dollars you spent (the figure at the bottom of column two). See Figure 4.
When you're done, all the categories should add up to 100% -- and this is how the Newmans discovered that 3% of their income was going to coffee and candy bars. And you'll be just as shocked about how you're spending your money as the Newmans were shocked about how they were spending theirs, and that's how you'll fix it.
You'll see that you are spending incredibly high percentages of your income in completely foolish places, and you won't tolerate it. Instead, you'll stop. But 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.
Financial advisor and educator Ric Edelman is the best-selling author of five books, including Ordinary People, Extraordinary Wealth, The Truth About Money, Discover the Wealth Within You, The New Rules of Money and Financial Security in Troubled Times. His firm, Edelman Financial Services Inc., is one of the largest independent financial planning firms in the nation with nearly $2 billion in client assets under management. He also hosts weekly radio and TV shows in Washington, D.C. and is the founder of the Edelman Center for Personal Finance Education. Visit Ric online at www.RicEdelman.com.