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)
  • Savings

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.

More about...Budgeting

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pimpybra
pimpybra
9 years ago

This is why I’ve been using mint.com and it’s been great for looking at what was spent and using the categories and budget tools to help divvy up like this.

I also have my ‘register’ in a google docs spreadsheet, with the next 6 months ‘planned’ out with income, known bills/etc, as well as budgeted amounts for groceries,gas,restaurants,entertainment, etc. It’s been really helpful to plan ahead and not get in a tight spot.

Sandycheeks
Sandycheeks
9 years ago

It seems like a basic concept but can be surprisingly complicated. One problem I run into is being able to seperate out categories from large super store receipts.

For example, if I go to Wal Mart/Sam’s Club, I may be spending money in almost all of these areas i.e. food, gifts, entertainment, cell phone minutes, health care items, car repair supplies, a new shirt etc. Taking the time to cross reference each receipt and make spreadsheets is much more time consuming than just adding up the totals of receipts.

How do other people handle this aspect of budgeting?

Derek
Derek
9 years ago

Love the post. It’s nothing exciting, but it truly is necessary to know where the cash is going every month in order to create that budget! I write about similar items on my site – saving money, finding deals, and earning more. Check it out at http://www.lifeandmyfinances.com

Pat @ Do Not Wait
Pat @ Do Not Wait
9 years ago

The biggest issue that I find people have with tracking their spending is… the harsh reality! When I first attempted to get into this world of “money management” I thought I was going to cry when I realized how much money I spent on nutrition and going out. This really discouraged me and I didn’t want to track my spending any more.

What tips would you give to those that are initially discouraged when they attempt to track their spending?

Jon
Jon
9 years ago

Check Fu! lets you balance your checkbook, tag your transactions, and plan your spending, all in a secure, simple web app. Check it out, grasshoppers. http://checkfu.com

@Sandycheeks: Check Fu! doesn’t force you to funnel each transaction into just one category or bother you with the ‘split’ screen. You can put as many tags as you want on each transaction–good for tracking those multi-purpose big box trips.

April W.
April W.
9 years ago

Thanks again for another great post Gail!

“Kwitcherbitchin!”- that made me laugh! I too well know the pain of sitting for hours to figure out where the money went, so I could stop the flow.

@[email protected] Not Wait: What I found that helped me was to realise that that money was spent and gone. I could never get it back. But I resolved to do better each month, even if that meant only by $20 that I could divert to debt repayment and savings. Keep trying,a nd you’ll get there.

Jason Beck
Jason Beck
9 years ago

Excellent post! We see this sort of post often, but it’s obvious why it’s needed. And I think this blog likely gets fresh faces in, often.

(Minor typo of “fist” where it should be “first”.)

Thanks for good writing!

Dave
Dave
9 years ago

There’s a category for bank fees but nothing for insurance (house, car, health, life, etc.)? Interesting.

Jennifer
Jennifer
9 years ago

In answer to Sandycheeks ~ I use an Excel spreadsheet to track my spending every week. I do almost all of my grocery shopping at Meijer. My spreadsheet has one line item for “groceries” which includes everything I bought – that frequently includes things other than food, such as furnace filters, light bulbs, panty hose, etc. It all goes into the “grocery” category. If I happen to buy something there that is out of the ordinary – such as a birthday gift for someone – I enter it on the line item that is under my “incidentals” category. Since I… Read more »

Tracey H
Tracey H
9 years ago

I use Quicken to track all of our expenses and it makes it easy to split up multi-category receipts. You just enter them in and it does the calculations of what’s left (and there’s a built-in calculator for you to do the taxes). So I put in the fewest items (the categories that have few items) and leave the biggest (usually groceries) to be the leftover amount.

Kim
Kim
9 years ago

We use Quicken as well – can’t imagine life without it.

I wonder though how someone with an aversion to tracking spending would feel about using financial software?

Karen in MN
Karen in MN
9 years ago

I use an excel spreadsheet to track my spending in different categories–it’s simple to just fill in the right amount from each category from your Wallmart or Target receipt that inclues 15 different things. Very easy. After all, I only go to a store like this once every week or so. It may seem like a hassle to do it, but it’s actually more of a hassle to be broke with out of control spending. I like to visualize the cash I’m saving by tracking my spending as I enter it—somehow this makes it seem more worthwhile. For example, if… Read more »

Panda
Panda
9 years ago

Sandycheeks – I’m a bit like Jennifer. The total tends to go into the largest category (which for me is usually groceries.) Only if there’s big money for something unusual do I split it out.

MikeTheRed
MikeTheRed
9 years ago

I completely agree that you need to know where the money is going in order to get your financial house in order. I had to do exactly that before I could begin my debt turn-around in 2008. Mint.com was what made that possible. And hell yes it was eye-opening to realize where all of my money was going. All that said, categorical budgets simply don’t work for me. With everything else in my life, tracking grocery spending vs fuel spending vs whatever just doesn’t happen. So instead of that, I basically pay out my fixed costs (rent, utilities) first of… Read more »

John Wright
John Wright
6 years ago
Reply to  MikeTheRed

I’ve basically come to the same conclusion. Pay everyone the first of the month, then live off the rest.

GMS
GMS
9 years ago

@Sandycheeks – The way I solve it is to keep categories separated in the cart. Then at checkout pay for each category with separate transactions. That way you get a receipt for groceries, one for household items – you get the picture.

Luke
Luke
9 years ago

You are absolutely right! I can’t say “amen” enough to this. Tracking my spending, even more than budgeting, has been incredibly helpful in my financial life. Often I’ve found that just the knowledge “I’ve spent $X on eating out” tends to curb my spending in that category without much effort. This is why I created a very easy-to-use tracking and budgeting system called NeoBudget (http://www.neobudget.com). It’s designed exactly for this purpose. While it’s not the only solution out there, I’ve found it to be the best (of course, I may be bias since I created it specifically for my needs… Read more »

Norman
Norman
9 years ago

For me, the first and most important step to living within my means is to pay myself first. If I am saving a good percentage of my money right off the top, which includes retirement, long-term, and short-term savings, paying all my living expenses, then the rest is mine to spend. However, I can see where a spending analysis is necessary for folks that are overspending and using credit cards to supplement their income and for those who don’t have a knack at understanding where their money is going. Also, some people enjoy the process of analyzing their outflow. For… Read more »

Eric Poulin
Eric Poulin
9 years ago

Amen. If you track your money, you are WAY more conscious when it comes to actual spending and you’ll make much better decisions regarding wants vs. needs.

Tim @ Faith and Finance
Tim @ Faith and Finance
9 years ago

My wife and I use mint.com to keep us on track with our spending because it’s free and pretty fun to see everything so organized. We’ve been using it for over 2 years, making paying off debt and saving money much easier.

We found that we could save more through automatic savings (straight from our paychecks to the savings account) when we had our budget in order. Once we started this, our savings grew faster! –but you have to start by knowing where your money is going.

Great post!

Marie
Marie
9 years ago

I love Gail Vaz-Oxlade!!!!!!!

Adrienne
Adrienne
9 years ago

I think that this is the most important part of personal finance (M Next Door anyone). Sandycheeks – I have one category for groceries (that includes food, cleaning supplies, etc) and one for shopping (most everything else you’d buy at Walmart). I think if you make it too complicated you won’t keep up with it. I just use a spreadsheet as well. The categories you choose should reflect what’s importatnt for you to track. Personally I track groceries separate from restaurants because I view them much differently but you may split out your shopping because you want to see how… Read more »

Kevin M
Kevin M
9 years ago

I have a small quibble with the category list – if you own a home aren’t “Shelter-mortgage”, “Interest” and “Debt” the same thing, or at least overlap?

Same with “Shopping” and “Entertainment”.

Also, savings is, by definition, not spending.

lawyerette
lawyerette
9 years ago

Here’s a place where using a debit/credit card really wins out over cash. Amex lets me tag all my transactions with categories I come up with myself. I keep all my receipts. Every couple of days I clear my wallet and double check the receipts against my online statement and then toss the receipt unless I purchased a >$50 item. I love this method, I can quickly see at a glance what I’ve been spending on and I know my credit card statement is correct. Sandycheeks – I have this same issue as well, but for me its never more… Read more »

Janice
Janice
9 years ago

Just like tracking what you eat when you’re serious about a nutrition plan, you really need to track what you spend. In both cases it’s really astonishing what you “waste” either in empty calories or mindless spending. And I do mean mindless. Find a way that works. Whether it’s just tracking essentials and living on what’s left if you can’t do details or, like me, I even track what I spend in cash on an excel spreadsheet. Taking a few moments every day is no big deal compared to time, energy, worry and money you waste on needless fees, debtors,… Read more »

Roger
Roger
9 years ago

This is a great article. I was scratching my head myself until I started doing a bank reconciliation starting January 2009. I see where I need to stop spending–mainly, food and entertainment.

I was wondering if anyone has some percentages we could apply to our budgeting; ie.: If you make 30k a year, you can only spend 2% in entertainment. This might be really helpful.

Matt
Matt
9 years ago

After being with her for several months, I finally convinced my “better half” to let me start tracking our income and expenses. The knowledge gained from doing so allowed me to show her where changes were required (and, yes – changes were required, of course). It’s tough to make money moves without the knowledge. There are plenty of free or dirt-cheap online tools that allow for income and expense tracking – so there are no excuses to not budget (other than laziness).

Steve
Steve
9 years ago

I used to track my expenses. I used a desktop program (now defunct) to do so. Eventually I stopped doing it – not really a conscious decision, it was just taking too much time so I kept up with it less and less. I don’t have any $10/day habits that I am aware of. And anyways my wife and I both have such natural frugality, that even after the “pay yourself first” strategy, we end up with money left at the end of every month.

Ryan
Ryan
9 years ago

I love watching Gail’s show – while I don’t have problems with consumer debt the show reinforces my commitment to stay away from it! Seeing people my age (30) who have 25k+ in CC debt, just bought a house, etc and are ready to lose it all – quite the house of cards. I use a simple Excel spreadsheet I created and no longer have to track every single penny as I have several years of month-to-month data so I know approx. how much I should be spending on groceries, gas, entertainment, mortgage, monthly. Best of luck to all –… Read more »

Megan
Megan
9 years ago

Sandycheeks – I don’t agree with the advice above. I don’t like lumping everything together, and I can think of nothing more time-consuming than ringing up my cart into two, three, or more separate transactions. This is what I do: 1. Look at your receipt. You’ll notice that a typical big-box retailer doesn’t print out your receipt in order of the items scanned – instead, like at Target, they lump the purchases together, “like with like.” So, your clothing items are all under one category, your food is under another, etc. This is great. 2. You’ll see that your receipt… Read more »

Andrea
Andrea
9 years ago

I track our spending in excel. We do have a $20 a week “mad money” category, that we use to spend on the little stuff (coffees, a pack of gum etc). Everything else we buy using our credit card, to get the points, and then I enter it in excel biweekly. We actually used Gail’s six month tracking before creating our budget, but it’s still needed some tweaking. We bought a house in there, and I was super-pregnant, so we underspent in some categories (clothing) and overspent in others (house stuff, dining out) For us, having a budget is actually… Read more »

Megan
Megan
9 years ago

Just to add to my previous post – I know now what I’m doing when I go to Target, so I have my system down cold for adding and subtracting. It’s really not that bad!

Techbud
Techbud
9 years ago

I use excel. It was an eye opener after the first month. It’s a must no matter how you track your expenses.

Paul
Paul
9 years ago

We find that tracking every purchase is an inefficient use of our time. Our family already has 3-6 months of income set aside in an emergency fund and automatically put 15% of our income into other investments. When the spicket breaks – and it will – we’l make a joint decision as to what we need to cut to survive. I would rather spend my time creating memories with my family or going for a long walk or run. That’s my two cents (and I’m not tracking it)! 🙂

Marly
Marly
9 years ago

So far, nobody has mentioned that they are just not making enough money to cover their expenses. I, like many others, can’t make a living on only one skill, so am working my tail off to created multiple streams of income, including a brand new blog I created at http://www.makingmyownwork.blogspot.com to record my journey to financial independence.

I can usually cover my basic expenses,but have to use the profit I make from one income source to finance another, and it gets mighty tight at times. How do other people handle this?

Diane
Diane
9 years ago

Sandy, you hit the nail right on the head! When I am working with clients, it does not matter what the financial issue or concerns are, i.e. “do I have enough to retire?” or “I am earning less than I did, how will I manage?” It always comes down to what and where are you currently spending your money. A business coach recently asked me, “What is the most important question that must be answered before you go on a journey?” The answer is where are you starting from. While it can be tedious to keep track of expenses. It… Read more »

Kelly
Kelly
9 years ago

@Sandycheeks: I struggle with this too. It’s a pain. However, at my MOST diligent (for a couple of years a year or so ago) I literally broke down every item on “mixed” receipts. It is time consuming, but I found it very helpful. OR, if you only have two or three categories in your cart at the store ask the cashier to run seperate transactions for you. Usually they don’t mind. I put all of this into a handy Excel spreadsheet that a friend and I created and it worked GREAT! For a couple of years we cut WAY back,… Read more »

chacha1
chacha1
9 years ago

I use a spending plan rather than a budget per se, but agree that keeping track of what you spend and adjusting your budget/plan accordingly is the BEST way to get ahead financially. DH and I are blessed with a generous cash flow, but when I started using Quickbooks to do our tax prep a few years ago, BOY what an eye-opener! What I like about QB is you can set up your own categories, and tag them for Schedule C (US business expense tax form) as needed. So I can do an “Insurance” account that has sub-accounts for Auto,… Read more »

Lance
Lance
9 years ago

I find it ironic Gail is advocating tracking everything. As any mint.com user knows, the easiest way to track every penny is to use cards to pay for everything– credit, debit, whatever. Which is exactly the payment mechanism that Gail tells people not to use. The “jars” system is a recipe for failure, at least so far as tracking is concerned. If you’re headed to wal-mart, do you pull $15 out of the food jar, $20 out of the clothing jar, and $5 out of the medicine jar and reconcile it when you get back? Absurd.

MutantSuperModel
MutantSuperModel
9 years ago

Like so many others: yes, yes, and yes again. It’s HARD to do and to commenters like Pat @ Do Not Wait mentioned, all I can say is KEEP DOING IT. Set a goal that you’ll track it for six months, tell people you’re doing it, whatever you need to do. And just keep doing it. I’ve been tracking my spending for awhile now. Mint was ok but hid too many cash transactions from me that were too easy to “forget”. Excel makes me 100% accountable, no ands, ifs, or buts. I hate seeing the money dwindling, I do, but… Read more »

Julie
Julie
9 years ago

Does anyone try to track individual grocery store items? We spend a lot of money at grocery stores every month, and I’d really like see a breakdown. I saved all of our grocery receipts for a month, but then couldn’t face the thought of entering every item from a month’s worth of receipts into Excel. Wouldn’t it be great if we could get access to our data from grocery card programs?

David/moneycrashers
David/moneycrashers
9 years ago

I disagree, unless you’re referring to tracking a spouse’s spending.

To me, no spending is truly “unconscious”.

I was in debt as deep as anyone, and I never “tracked” a dime.

Rather, I invested all my time in “eliinating” spending.

It took some time but it worked like a charm for me…

Travis
Travis
9 years ago

What is obvious from the above comments is that one size does not fit all. While some find tracking down to the penny necessary others are able to track generally where their money goes; both with good results. But the point being is to know where the money is going. Budgeting/tracking does not have to be complicated, difficult, or time consuming. They can be simple and quite fun to work on. One poster stated he would rather spend time with his family. In order for a family to make a budget work they all have to be involved. (At some… Read more »

Arenda
Arenda
9 years ago

Till debt do us part is one of the few shows we can enjoy together at home. You rock Gail!
The interactive budget sheet on your site gives a good idea of which budget items need looking at.

Great post!

Siebrie
Siebrie
9 years ago

Research in the Netherlands (‘Genoeg’ / ‘Enough’ magazine)has shown that it does not really matter HOW you track your money/keep your budget, simply the fact that you DO SO is enough to live within your means and get ahead in life financially.

Tracy
Tracy
9 years ago

I’ve been playing around and testing some different personal finance software over the last few months. I did a lot of research before starting my trial and error period and discovered that I really needed to actually take on a trial and error test run of the programs that I was seriously considering. I did this because while some programs worked well for some people, they just didn’t fit my goals or lifestyle. In response to an earlier post about shopping at the all-in-one stores, the majority of the budgeting software on the market today allow for you to split… Read more »

HollyP
HollyP
9 years ago

My family’s recent experience is a testament to this post. In July my husband and I evaluated our financial situation and felt our financial future was very secure. We both had good jobs, loss of those jobs was unlikely. In late August MrP lost his job. In a flash, we were able to use the data generated by tracking our expenses to create a new budget. Since the data was historical, we knew how much & where we could realistically cut. We also knew we could afford for MrP to take time off to retrain for a more advanced career.… Read more »

Meg
Meg
9 years ago

I enjoy watching Gail every week on CNBC. I love her no-nonsense ways of dealing with couple’s financial issues.

I signed up for mint.com a while back, but didnt like it at all. For some reason, over the past month, I tried it out again, and it just works for us! I love it. I can see how much I have in the budget for groceries or gas money, and where I am at any time in the month. As the saying goes, Keep it Simple Stupid, and that’s what Mint.com helps me to do!

Trina
Trina
9 years ago

We use our debit and credit cards for everything (and pay off the credit card in full every month, of course), and when I download the transactions into Quicken they’re already categorized for me. In a few instances I have to put a category on the transactions, but it’s rare. I have 3 years of data, and it’s extremely helpful because I know exactly where my money goes and what we can easily cut back on when we need or want to. I don’t break out the $ for trips to Costco because I just don’t think it’s worth it.… Read more »

Gal @ Equally Happy
Gal @ Equally Happy
9 years ago

I respectfully disagree. I think trying to adhere to a strict budget is like trying to adhere to a strict diet, sooner or later it overwhelms you.

You’re better off focusing on just not spending much (and eating healthier) than on crunching numbers every day.

Lindsay
Lindsay
9 years ago

@Sandycheeks I know what you mean. I can never remember how much I spent on clothes vs. groceries two weeks ago in Walmart. So whenever a trip to a big store includes lots of categories, I save that receipt and put it on my desk, so when I do get around to tracking my spending for the past.. month.. haha.. I can grab that receipt and parse out the booze from the bonnets. In general, I like these categories, but I do use smaller categories to keep track of problem areas. For example, I have booze and cigarettes and fast… Read more »

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