Wednesday, May 11, 2011

Tracking expenses

If you feel as is your expenses are out of control, or even if you're staying well within your income but still feel like you can't account for exactly where some of your money is going, you probably should consider tracking your expenses.

There are lots of approaches to this, but for those in real trouble, I recommend tracking your income and expenses precisely. This doesn't have to be permanent, but until you can actually account for exactly how you spend your money, how can you budget it?

When I say track it precisely, I mean just that. Carry a small notepad or even a couple of index cards and record everything you spend through the day: what you spend for lunch, the tip, gas for the car, the soda you buy when paying for the gas, the lottery ticket, plus all the bigger expenses like the utility bill. Also, record any income, down to the nickle you find in the parking lot.

At the end of the month, add up expenses and add up income. If income isn't more than expenses, you have a problem. Look over the records to see where you have unnecessary expenses and work on cutting those back. If you rebel at the idea of tracking every soda you buy, allow yourself to carry a special envelope with $10 or $20 in it that is used just for those odds and ends, and record each time you "refill" that envelope rather than each expenditure.

In the best form of this, you'd start at the beginning of the month (or whatever period you decide to track), list all of your money, including all bank accounts, down to the change you throw into a cup holder in the car. List all of the outstanding bills and debts. Then make a daily record of expenses. There's a lot of flexibility there, you can even just keep all the index cards in a folder. I created a spreadsheet that recorded daily expenses by category, with the advantage that it kept running totals for me.

At the end of the month, again list all of your money and debts and figure out the change from last month. Then add up all of your income for the month, including any interest on your bank accounts, and all of your expenses, and subtract the expenses from income. The change in your money/debts should be equal to the difference in your income and expenses. This sounds complicated, but it doesn't have to be. Because I had a credit card, I did find I had to keep up with which expenses were paid on the credit card to make this balance out correctly.

If your results are almost balanced, you probably have a fairly accurate record of your expenses. But if you're off by more than $10, you're not recording some things. Most people who try this are shocked at how much they're spending on little things.

With a little thought, you can actually make this something that can be done in very little time. I tracked very carefully for 5 or 6 years, and probably still should. However, I am very conscious now of where I spend my money. One of these days, I'll probably return to this method.

One of the most detailed descriptions of this sort of record keeping can be found in Joe Dominguez's Your Money or Your Life. You may have to plow through quite a lot of activism to get to the meat of his method, but it's a good method, although there is also some outdated material.

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