Do you find yourself living from paycheck to paycheck? Do you worry about how you can make your next credit card payments? Even worse, do you feel helpless when you try to think about how you’ll ever manage to retire at 65 (let alone “freedom 55”) or do you try not to think about it all? Most important, do you feel overwhelmed at the idea of coming up with a personal budgeting kit?
Have you ever wondered exactly where your money goes? Or been surprised at how little money you have left at the end of the month, even though you know you’re making a decent living? If you answered yes to either or both of these questions, the following exercise should be a real eye opener.
Identifying your current spending pattern is an important step in mastering your finances. Once you understand your spending pattern, you will be better able to plan your spending more efficiently to meet the financial goals you set for yourself. In fact, tracking spending is so important that you will make it your first step in your personal budgeting process.
We spend money each day, often without giving it much thought. We particularly don’t think about the small purchases we make, such as the daily lattes and muffins, metered parking, or the occasional magazines we pick up at the grocery checkout counter. Nonetheless, at the end of each month, we find ourselves wondering why we’re always left with so little money.
Your personal success in financial budgeting lies in knowing where your money has disappeared to. You will be amazed to see how those cups of coffee can, by the end of the year, add up to the equivalent of one major purchase. The purpose of tracking your day-to-day expenditures is to help you identify your daily spending pattern: to find out exactly how much money is flowing out of your wallet and where it all goes on a daily basis.
Track your day-to-day spendings for seven days. Do not alter your spending habits during the week of this exercise. Record how much money you spend on each spending category (such as groceries, household supplies, coffees and snacks, clothing, haircuts, gasoline, hobbies, etc.), and count the daily total.
Once you know how much money you spend on a daily basis, you can start tracking your weekly spendings for each category. Summing up each category will help you appreciate how repeated small purchases add up and how much impact they have on your total spending. This will give you an idea of how your current spending pattern will begin to look over the course of year.
When tracking your weekly spending in each category make a note of how frequent such purchases appear (weekly, bi-weekly, semi-monthly, monthly, etc). This will help you understand what your spending looks like over the course of a year.
Here you summarize your spendings for a year. It tells you how much of your money you are parting with over the course of a year, based on your current spending pattern. This can be an important dose of reality as you decide how to manage your finances.
Based on your weekly tracking and your estimate of how frequently your purchases repeat in a year, you can estimate your yearly total. To estimate your yearly spendings, use your weekly records and multiply them by the frequency (if something occurs weekly multiply by 52, bi-weekly by 26, monthly by 12, etc.) Then, take a note of all of your monthly payments (mortgage or rent, cable, telephone) and multiply by 12. Record all of your other payments, and add up their yearly amount. Adding it all up will show you how much you or your household spends in a year.
Completing this exercise will give you an estimate how much money you spend yearly, what you spend it on, and what your habits are. It’ll also give you a basis for changing those habits and help you develop new ones in order to start saving more money!
More tips on how to track your spendings and plan your budget can be found in Personal Budgeting Kit by Sylvia S. Lim. The book includes worksheets for the exercise described above, as well as other resources to help you keep track of your spending habits and plan a more efficient budget.