In our last installment of Budgeting 101 we discussed the importance of creating a budget and how it allows your money to work for you. But how can you create a plan to whip your finances into shape if you don’t know where it stands in the first place? The first step in budgeting is to identify how you’re currently spending and on what.
When beginning to establish a budget, most find it to be a sobering experience while others may realize they are on the right track for managing their spending.
Why Track Your Spending?
We can never stress enough the importance of tracking your spending. Besides the fact that 62.4% of millionaires track their spending, the prime reason is to provide a foundation to build your budget and alert you to any potentially harmful habits or trends.
For example, you spend $1.50 on a bagel with your coffee in the morning. While it’s only a $1.50, if you do this 2-3 times per week you’ll soon realize that $1.50 turns into $25 each month and that does not fit within your financial goals. By tracking your spending, you’re able to pinpoint these items that often go without consideration which will allow you to make a simple change to help bring you closer to your desired financial status.
Another example may be your grocery store spending. “Quick” trips to the grocery store can add up fast and bust even the best savings plan. Within a month of tracking, you’ll spot your weak points and from there determine the best strategy to correct them.
What Should Be Tracked?
The simple answer: Every cent you spend. If you put $.75 in the parking meter downtown, record it. If you pay the $200 power bill, record it. That $1.00 cookie in the cafeteria at work, yep, you have to fess up. The only way this process works is if you’re honest about every penny spend.
How To Track Your Spending?
When tracking your spending it’s important to find a simple system to ensure you’ll stick with it.
Here is an example to help get you started:
- Appoint one person to manage the process. Having each person record their spending separately will only create more headaches down the line.
- Members of the household are responsible for reporting their spending to the appointed record-keeper at the end of each day. While this may seem like overkill, the idea is to eliminate all margins of error. Waiting until the end of the week will not produce accurate results.
- Said person records the spending in a central ledger to be evaluated during family budget meetings. The ledger can be a simple notebook with columns for each category such as Groceries, Automotive, Take-Out, Entertainment, Clothes, etc. or use create an excel spreadsheet.
- At the end of the month you should have a clear picture of your current spending and be able to establish next months budget more accurately.