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Who Has All Your Money?

Most of us don't really know where our money goes. We pay our bills, spend as we see fit along the way, and if there's money left over... great. If not... plastic. Even if we don't have significant debt, our money may not be going to places that enhance our net worth or well-being.

The beginning of a new year is the perfect time to get a handle on the flow of your dough. Many banks and credit card companies send customers a spending summary from the previous year, which will give you an idea of who ended up with all your money. Plus, if you're like me, you're stuck inside due to icy roads anyhow, so you might as well get some work done. (As for my relatives in Florida, perhaps you can take a break from your gratuitous waterskiing to improve your finances.)

Figuring out where your money went can be tedious, and even depressing. But don't focus on the process; focus on the result. After all, you spend a huge chunk of your waking hours trying to make a buck: Don't you think you should be sure that your time is worth it? In fact, there are many benefits of tracking your money. Here are a few.

Awareness
In the course of a single day, money spills out of your checking and savings accounts every which way. The daily portion of your rent/mortgage, the electricity to run your fridge and light your house, the water for your showers, the cereal you ate for breakfast, the burger you bought for lunch, the gas that powered your car to work, that book from Amazon.com (Nasdaq: AMZN  ) , the per diem share of your phone service... and the list goes on and on. Why, you're practically exhaling money with each breath. How will you know if you're getting your money's worth if you don't know exactly how much is going where?

Control
Every person should be in charge of her finances, and not the other way around. It's a question of allocating limited resources to seemingly unlimited choices. Some of those choices put you in the driver's seat (e.g., a sufficient emergency fund, a retirement nest egg, prudent investments). Others put you in the paddy wagon (e.g., excessive debt, unaffordable luxuries, speculative long shots). So which way is your money going?

Goal attainment
Unless your main financial mission in life is to collect McDonald's (NYSE: MCD  ) Happy Meal prizes, your goals will probably cost more than a few hundred smackers. We'd also guess that you'd prefer to realize your goals sooner than later.

Tracking your finances -- and ensuring that more money is going to priorities than frivolities -- will increase the chances that you'll reach your goals, and shorten the time it takes to realize them.

Security
When people are asked why money is important to them, one of the most common responses -- besides "I'd like to dabble in world domination" -- is "peace of mind." Money can't solve all of life's problems, but it's nice to have some when the furnace blows up, the chimney falls down, or termites gather. Knowing how much things cost, where you can cut back, whether you're adequately insured, and exactly how much you can afford to spend on an emergency goes a long way to providing economic equanimity.

On the money trail
So let's see where your money's gone. Gather the statements of any account from which you pay bills. If you don't have the statements handy, you may be able to access them via the Internet. It may help to have your checkbook available, too, if you keep accurate records in the registry.

On a sheet of paper or on a computer spreadsheet (which is better since the program will do the math for you), list out your expense categories. (We provide such a list at the end of this article.) You might also use the budgeting features in money management software such as Intuit's (Nasdaq: INTU  ) Quicken or Microsoft's (Nasdaq: MSFT  ) Money. Once you have your paper or computer ready, start categorizing your expenses.

Now, we know that following the footprints of every one of your dollars over the past year might be daunting, if not downright impossible. The more information you gather, the better -- especially when it comes to annual expenses such as life insurance premiums and AAA memberships. But even analyzing six months' worth of spending -- or even three months' worth -- will prove informative.

Alternatively, you could boil your expenses down to broad categories. Choose two or three of your biggest categories (such as food) to break down into more detail (e.g., groceries, eating out, lunch, sugary cake snacks). This will provide you with enough information to get started -- and may provide some shocking revelations. ("I spend $50 a month on Ding Dongs?!") Once you've got a grip on the bigger categories, then you can gradually become more detailed as necessary.

The cash conundrum
Cash is wonderful. It's accepted everywhere; it won't ruin your credit record; you don't get an account statement and concomitant mail to add to your paper pile; you don't have to suffer the grocery-store cashier pretending to be a handwriting expert by comparing your signature with the one on your credit card; and you can laugh at the crazy hairdos presidents used to have (tame those fly-aways, Andrew Jackson!).

Unfortunately, from a money-tracking perspective, cash is like youth. It seems to disappear overnight, you don't know where it went, and you can't get it back.

If greenbacks are your main mode of payment -- or if you find far too many ATM withdrawals on your bank statement with nothing to show for it -- you'll have to expend a little more effort to track your money. Here are some suggestions:

  • Give up cash for a while. Just use checks or debit or credit cards and let your bank keep your transaction records for you. (Of course, pay off your credit card balance in full at the end of the month.)

  • Keep a small memo pad with you and record any transactions you make. Or try our spiffy Spend Less Patch (pdf file).

  • Every time you make a purchase, keep the receipt. If the items purchased aren't listed on the receipt, write them down. When you get home, put the receipts in a jar. At the end of the month, total up your expenditures.

  • Use your PDA. We're talking about "personal digital assistant" here -- like a Palm or Handspring -- not "public displays of affection," which earned you several detentions in high school. Record your purchases as you make them. You can categorize your expenditures then and there if you have a spreadsheet program.

Money autopsy-turvy
Once you have figured out where most of your money went -- did you know you bought so many collectible lunchboxes off eBay (Nasdaq: EBAY  ) ? -- do some cost-benefit analysis. How much money went to worthwhile endeavors (e.g., a well-deserved vacation, a photography class), how much to savings for important goals (e.g., retirement, college), and how much to stuff that now collects dust or expanded your waistline (e.g., Beanie Babies, Big Macs)? The more you direct your money toward the first two, the more today's spending will pay off years down the road.

For more on getting more power from every dollar, check out The Motley Fool Personal Finance Workbook: A Foolproof Guide to Organizing Cash and Building Wealth.

Robert Brokamp spends too much money on stuff that has resulted in too much belly, which necessitates buying new, bigger pants.The Motley Fool is investors writing for investors.

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