Taking Financial Inventory: Examining Your Spending Habits
Understanding how and where you spend your money is a big step toward hitting your financial goals. Even if you do not fall victim to the problem of having "month left at the end of the money," you may not be mindfully spending or saving your income in ways that reflect what you really want. An analysis of your spending habits can result in a low-maintenance and achievable way to watch your budget and control where the money goes.
How You Spend
Think about and make a list of the different ways you spend money. You can easily unload your earnings in many ways: writing checks, using debit and credit cards -- and of course there's good old cash. Using multiple spending methods can make tracking your spending more difficult. As financial planner Michael J. Fitzgerald notes, "I have learned from my wealthy clients that people who have lots of money control spending by using a primary spending tool, such as one credit card account, that gets paid off each month." If you choose to consolidate your spending through one or two channels, you can more easily see the scope of your money movement.
Total and Categorize Your Spending
Collect, organize and put into a category every instance of spending you do over the course of a month. Traditional methods like using bank statements, credit card statements, checkbook registers and receipts to produce a pile of data can be overwhelming. Personal finance software can simplify your record gathering, allowing you to spend time reviewing how you spend. The very act of recording every time you spent money can lead to one of those "Oh my!" moments: suddenly you see where the money is going. As Fitzgerald says, "You cannot find the seepage in your spending until you look at a full budget."
Automate Your System
Fitzgerald emphasizes to his clients the benefit of linking all of your spending with a system that automatically collects and categorizes the money you spend. "It's like having a free bookkeeping service," he notes. The spending and expenses information can typically be downloaded right into your finance software, giving you the information you need to analyze your spending habits.
A detailed picture of your spending will allow you to find money to fund your financial goals. "Find budget waste and redirect the money toward those items that are more important to you," says Fitzgerald. He also advises that clients keep long-term records of spending and expense data -- four to five years' worth -- so they can track how their budget changes as their income grows and their lifestyle adjusts. The money you earn is yours to spend, and an analysis of where the cash goes allows you to make sure your top priorities are covered.