To effectively budget you need to know where you’re already spending your money. By tracking every penny you spend you’ll discover all of your personal spending black holes, whether it be eating out, that gym membership you never use, every streaming service known to man – you get the idea. So, for the next three months get out your magnifying glass and your deerstalker and play detective on your finances.
Step One: Set up a spreadsheet
To determine your spending habits and pitfalls you need to track your every expenditure and log it in detail for at least three months. While there are plenty of apps out there that will show you your spending (like the S1 FinFit App) none are going to breakdown and categorize your spending the same way you do – so, for the next three months you’re going old school.
Pre-Tax Income: At the top of your spreadsheet, record the pre-tax income generated. If it’s from multiple sources, list each one of those sources.
Spending: Your spreadsheet should contain the following information for each expenditure: date of purchase, vendor you purchased from, amount spent, item or service purchased, category such as rent or mortgage payment, utilities, transportation including parking fees, groceries, medical co-pays, health, car and other insurance bills, income tax and property tax (if applicable), charitable giving, dining out, gifts, clothes, electronics, etc. From a $2 candy bar to a $30 Uber, every single penny you spend needs to make it on your spreadsheet.
Donated, Tossed or Recycled: Don’t worry, you don’t have to log every candy bar wrapper or Cheetos bag, but if you donate or otherwise dispose of clothes or household items (appliances, books, towels, sheets, etc.) use a separate spreadsheet tab to log the item, how long you owned it, how much you used it, and how much it cost. Estimating is ok here but know that you’re likely estimating up for length of use and usage and down for cost. Recycling a pair of running shoes you used several times a week for months is quite different from donating a shirt you never wore or a gadget you never used. Identifying these items can reveal some spending weaknesses and just how quickly you’re getting rid of your impulse purchases. You may also find that you can turn some of those purchase into cash via resale sites or consignment stores. If you do, log your sales price so you can see the difference between how much you spent and how much you received from reselling.
Step Two: Track that cash
Small cash outlays are the enemy of spending tracking. $2 here, $5 there, soon that $100 in your wallet is gone and you don’t know where it went. In this three-month detection phase you have three options (1) every time you make a cash expenditure – log it; (2) stop using cash altogether; or (3) put a set amount of cash in your wallet each week or month, log it as “Cash, Misc” in your spreadsheet and don’t run to the ATM for more cash if you’ve spent your weekly allowance too quickly.
Step Three: Log it all
Once a week log your credit and debit card purchases into your spreadsheet. Picking a set day once a week for this task will establish the habit.
Step Four: Analyze the data
Once your three months are complete, sort those entries into categories and add the expenses up (or set your categories up as you go so you can just look to your totals). What are your top three expenses? What are your top three discretionary expenses? Where can you cut back? Are you saving enough? Are you saving anything? Are you buying things on sale just to donate them without use?
Step Five: Plug those holes
Now that your eyes are wide open, identify where you can make changes. For example, when I first graduated from school with a billion dollars in student loans, I was careful with eating out and other obvious discretionary spending, but I would treat myself with new paperback books. When I completed my tracking phase I discovered I was spending $3,000+ a year on those “inexpensive treats”! I went right out and got a library card giving me access to even more books at zero cost – thousands saved. Are you a home repair junkie? Some libraries have tool lending too. With a little research you’ll be amazed at all the places you can save without sacrifice.