Why is this step important?
I spent my 20’s not paying much attention to my finances. If I needed something, I’d put it on my credit card without a thought. My wife and I both had good incomes, our mortgage was low, I never even considered that I was slowly digging myself deeper into debt. When we had a child we lost my wife’s income and suddenly it hit me… Where did all my money go?
When I took a hard look at my financial situation it was hard to believe how much money had simply disappeared into thin air. We didn’t have a huge house, fancy cars, large TV’s, or anything to explain it. As I researched, I found this was a very common situation. In general, people simply do not keep track of where they spend their money. I’m sure many that will read this entry are in the same situation that I found myself in.
OK, that’s a bad situation, but now what?
There are several steps to improving this situation. The first step is to track how you receive and spend money. Recording your finances gives you the knowledge you need to take control of your money and put it to work for you. You cannot possibly control what you do not understand, so please do not underestimate the importance of this first step. This is not budgeting, this is not a way to judge how you spend your money, it is simply gathering information on where your money comes from and where it goes. The data we gain here will help us to form a baseline for our spending habits.
So I can do this for a few weeks and that’s it, right?
Anyone who is serious about gaining control over their finances will need to gain the discipline to continue this step for the rest of their lives. Money is a magical thing, it can disappear extremely fast (and it doesn’t even take a magician). Financially successful people consistently keep tabs on their money, and soon you will too! This is the first step that will lead us to learning how to pull a rabbit (or money in our case) out of your hat rather than reaching your hand in and finding nothing!
How do I do it?
Tracking your finances is easier than you think, it simply takes discipline. I’ve been doing this for a few years now and I honestly don’t even give it a second thought anymore. It’s really not very time consuming and it doesn’t take a rocket scientist.
All you need is a place to record your transactions. This can be as simple as a notebook or as complex as a software application (personally, I use Microsoft Money). Any time you spend a form of currency (cash, credit, check, or even a gift card), record it. Make a few categories that are not too narrow nor too broad. For an example, here are the categories I use (add or remove categories that are more applicable to you):
- Automotive (Gasoline/Maintenance)
- Insurance (Health/Life/Auto)
- Utilities (Electric/Gas/Phone/Internet/Satelite/Water/Garbage/etc)
- Allowance
- Clothes
- Entertainment/Recreation
- Healthcare
- Household Goods
- Personal Care
- Charitable Donations
- Pet Care
- Dining Out
- Gifts
- Groceries
- Home Improvement
- School
- Subscriptions (AAA, Book Club, etc)
- Taxes
- Debt Payments
- Bank Charges
- Savings
- Retirement
- Miscellaneous
When you record a transaction, decide what category it fits best in. Note what it was and how much the transaction was for and keep a running tally. Get to where this becomes routine and you won’t even think about doing it anymore. It is important to record everything you spend. If you buy a can of pop out of the vending machine, record it. Drive through the fast food place? Write it down!
This sounds like a lot of work, how can I make it easier?
- Always save your receipts. If you have the option to getting a receipt, get one! All the information is there that you need to record and all you did was pick up a piece of paper.
- Use a spreadsheet or software program (such as Money or Quicken) if possible. Though this isn’t necessary, it makes things easier.
- Use online banking and billpay to your advantage. If you use a check, credit card, or even debit card, your transactions are recorded.
- Make it a habit! Taking a couple minutes at the end of each day to compile your receipts is much easier than trying to compile everything at the end of the month.
Summary
Congratulations, you’re well on your way to taming your money! Focus on recording everything and get a baseline for your spending. Once you have a grip on where your money is going you can start to work on budgeting (no, it’s not as evil as you think). I will cover that topic in more detail in the next part of this series.
Digg it!
Stumble it!
Posted under Budgeting, Series
