Where’s the money, honey? Why you MUST track your spending
People are always scratching their heads about where their money goes. I get letters and emails every week bemoaning the fact that although they seem to make a good income, some folks just can't get to the end of the month before they get to the end of the money. Of the hundreds of people I've worked with on Til Debt Do Us Part, only one person actually knew what she was spending. Astounding.
So, do you know what you're spending every month? If you don't know where your money is going, how can you ever hope to know what you may be over-spending on?
Unconscious spending is at the crux of the problem for most people who see their circumstances change even slightly:
- Lost a few hours a week at work? Where will you trim?
- Decided the time's right to have a baby? What will you cut back on in your spending while you're on maternity leave?
- Just broken your leg, twisted your back or come down with something that's gonna take more than a few days to heal? How will you cover your costs when your income slows to a trickle?
If you want to be able to cope with life's little surprises you have to first know exactly where your money is going. Sure, you may have a big emergency fund, but you may need it to last a long time, so that's no excuse for being complacent.
Giving up the delusion of “there will always be more money” is the fist step I make people take in my book Debt-Free Forever. Before I lead readers through the process of making a budget, I insist that they do a spending analysis. I've had more than a few complaints about how much work it is, how hard it is, how boring it is. Kwitcherbitchin! It's the much over-looked first step. And the knowledge you'll gain about how you spend your money is worth every minute of the work you'll have to do.
Don't even know where to start? Grab your last month's bank statement(s), credit card statement(s), and line of credit statement(s). Now, break every transaction into one of the following categories:
- Shelter (mortgage, rent, hydro, heat, taxes, maintenance)
- Services (cable, telephone, security, home-cleaning, cell, internet, childcare, health, pets)
- Food (everything you put in your mouth and swallow, including restaurants)
- Shopping (any Stuff you bought for yourself and anyone else — everything)
- Transportation (car payment, gas, repairs, highway tolls, taxis, bus, train)
- Entertainment (movies, books, magazines, hobbies, gym, club, sports)
- Bank fees (service charges, ATM fees, NSF fees — don't include interest)
- Interest costs (from everywhere)
- Debt repayment (don't worry about splitting out interest and principal, just add all your debt repayment amounts together)
In the best of all worlds, you'd do this for six months' worth of your paperwork. Why? Well, a half-year is just about enough time to catch all the things that only pop up periodically. Less than six months will give you some insight, but not clearest picture.
Now add it all up. Are you surprised at the places your money has been going? Which categories brought the biggest surprises? For the couples I work with, it's the small purchases made regularly, which add up to big money, that bring the wide eyes and gasps. They never imagined that their $10-a-day habit actually added up to so much money.
Once you know where your money's going, you're in a much better position to decide how you want to spend it. While it's all very well and good to say you only plan to spend $400 a month to feed your family of 6, if you've been spending two or three times that, your $400 budgeted amount may be nothing more than wishful thinking. When you end up going over, you'll blame the budget with a song like this: “See, budgets don't work.”
It wasn't the budget that didn't work — it was you. Yup, your unwillingness to do the work to see where the money actually goes meant you were just grabbing numbers out of the air when you came up with that budget, instead of working from a place of knowledge and purpose.
If you're determined to live a financially stress-free life, the first question you must answer is, “Where's the money, honey?” Do that, and you're well on your way to becoming conscious about your money and how you're using it.