This post is part of my Budgeting Basics series, which is archived here.
For those of you who are paying attention, you might notice that I skipped the Budgeting Basics on how to determine your income if you make cash tips. I will come back to it on Tuesday (Saturday being Christmas) when I have more time to figure out how to give you good, solid information without repeating too much of what I said in “How to Manage Money if You Make Cash Tips.”
How Much Do You Spend?
We’ve talked about how much you earn; now it’s time to figure out the other side of the equation: spending. More specifically, your spending habits.
For the record, I am not here to judge you, or what you spend your money on. If it’s important to you, I say go for it. My only requirement is that you spend less than you earn, and avoid going into debt. If you want to buy hand-painted ceramic figurines by the truck load (and who wouldn’t?), go for it, so long as you can also afford to pay your bills and eat.
30 Days to Understand Your Spending Habits
Before you ask, no, I haven’t figure out a way to “cheat” and get a realistic picture of your spending habits without investing 30 days. No matter how you slice it, that’s how long it takes.
It’s not very much time each day (maybe 20 minutes), but it will take 30 days.
Recording your spending
The reason it takes 30 days is because the very best way to get a picture of your monthly spending is to keep a record of what you’re spending money on through the month.
Seems so obvious you’re probably wondering why I’m saying it, but you’d be surprised at how often people gloss over that aspect of setting up a budget when they go to do. Guessing at how much you spend is an okay way to start, but the only way you’re going to know for sure if your guesses are correct is if you, you guessed it, track your spending the following month. 😀
Often people gloss over this step because it’s overwhelming or seems complicated and they don’t know where to start. I’m going to walk you through it, step-by-step, and by the time you’re done reading this page, you’ll have a plan for how you’re going to proceed with tracking your spending.
Step 1: Decide to Start
Make a conscious decision to start tracking your spending, and put it in your calendar that for the next 30 days, you’re going to be figuring out how much you spend. You’re modifying a habit, so having a concrete goal to aim for will help you stay on track.
Here’s the upside: It doesn’t really matter when you start.
If you want to start today, that’s great.
If you want to start on Monday (people often find it easier to start changing habits on Mondays), go for that.
Or, if you want to start 1/1/11, that’s even better. If one of your New Year’s Resolutions is to set up a budget and get your spending in order, we can do that.
Whatever day you want to start, circle the 30-day mark on your calendar. As I said, having a concrete goal to aim for will help you stay on track.
Step 2: Gather receipts
From the day you’re starting until that 30-day mark, keep every single receipt for every single purchase you make. Yes, every single one. Cash, check, credit, it doesn’t matter.
If the receipt doesn’t say on it what you bought, write that on the receipt. If you’re not going to remember how you paid for it, write that on the receipt. If you’re feeling really fancy, you can circle the date, to make your life easier later, but you don’t have to do that.
Every day, put those receipts someplace you can keep track of them. You can take 30 envelopes and label each with the date and stick your receipts in there, or if you have a 31-pocket accordion file (harder to find than you might think), that would work to. You could even just paper-clip the day’s receipts together and put them in a shoebox. Whatever works for you.
Step 3: Record your purchases
Here you have two options. You can either record your purchases each evening when you get home, or you can record them at the end of the 30 days. I recommend the former, but it’s entirely up to you. If you choose the latter, you will also want your bank statement, so you can make sure there aren’t any transactions you missed.
There are several options for recording your transactions:
Option 1: Use a check book register
- If you’re younger than 20 and/or don’t pay rent yet, you may never have used a checkbook register (or for that matter, a check), but they’re what your parents use(d) to keep track of their spending, especially before online banking.
Your bank branch will give you one or two for free, if you ask them the next time you’re in. Or if you’ve ever ordered checks, a register or two came in the box with your checks. Or, if applicable, your parents might even have some, so you could ask them.
The point is, if you choose this method of tracking your spending, find some way to get your hands on a checkbook register.
Then on every other line (there’s a white line and a grey/green line in most registers) record a transaction from a receipt that you collected. You’ll want to do them in order by date. I say to do every other line because a) it’s easier to read, and b) you’ll want to use the second line to record the category of the purchase (see below).
Normally on a check register you only record transactions that come out of your checking account, which does not (usually) include cash purchases. But for our purposes, I do want you to record cash purchases. You can either use a second check register only for cash, or you could use some means of notation for cash purchases in your check register.
It probably doesn’t matter which method you choose. If you were going to go all out and balance your checkbook at the end of this exercise, I’d recommend using a second register for cash purchases, but if you’re just going to be recording your transactions, then it doesn’t matter.
Option 2: Use a spreadsheet
- If you are MS Office Savvy, you can probably come up with a simple checkbook register to track your spending. If you don’t want to go through the the trouble, or want to use a spreadsheet but don’t know how to set one up, I’ve uploaded one for your use:
There are instructions for how to use the spreadsheet in the first workbook (the tabs along the bottom).
This spreadsheet is the one I used to track my spending before I discovered YNAB (You Need a Budget) (aff. link).
Otherwise, the principals are the same as using the paper check register, except it does the math for you and you can more easily insert a transaction if you’ve missed one along the way.
Option 3: Use Mint.com
- Whether or not you’ve used it, if you’ve been paying attention to anything financial these last few months, you’ve probably at least heard of Mint.com. It’s a free, online budgeting tool.
- How it works:
- You sign up.
- You give mint.com access to the accounts you want it to track (They use the same online security features as major US financial institutions, which is why it’s safer than it sounds.)
- Mint.com pulls your transactions from your bank (and credit cards) and puts them all in the same place, giving you an easy way to track your spending over the course of time month and saving you all of the work described above.
You will probably have to go through and re-categorize some of the transactions, because mint doesn’t always do a good job of determining which purchase falls into what category, so it’s still a good idea to keep your receipts.
Step 4: Assigning categories
The last step in tracking your spending is assigning categories to each of your purchases, and tallying up how much you spent in each category.
If you’re using the spreadsheet I uploaded, there are some categories already included, which will get you started on categorizing.
If you’re using Mint.com, they suggest categories for each transaction, as well as allowing you to add/create your own.
If you’re using the paper check register then you’ll have to come up with your own categories, but it’s really not that hard.
You can be as detailed (Groceries and Restaurants and Coffee) or not (Food/Beverage) as you want to. Each of the categories you create will be used in your budget, and will therefore be something you’ll have to track from month to month, so keep that in mind as you create your categories.
Check out this budgeting categories list if you get stuck.
Once you’ve got your purchases categorized, just add up how much you spent in each category (you can sort using Mint.com and the spreadsheet) and record that information with your the income information you’ve already come up with.
I told you there’s no way to cheat on this process, but I kind of lied. ^_^
If you were already tracking your spending, or keeping your receipts, or using mint.com, or whatever, then all you have to do is go back through them and categorize your spending (or sort by category in mint.com) and add up how much you’re spending in each category.
It will take you a while (an hour, maybe), but it certainly won’t take you 30 days.
Good luck with figuring out your spending, and stay tuned for the next installment in Budgeting Basics.
As always, if you have any questions, you can contact me. I’m always happy to help.
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