Do you know where your money goes?
I'm sure a few of you know exactly where it goes: You fire up Quicken, which you update diligently for every penny you spend, and you can tell me that 29.2% of your after-tax income in the last 12 months has gone to housing-related expenses, with further breakdowns for mortgage principal, interest, maintenance, and so on (and on).
Does that sound like you? If so, and if you can sustain the effort needed to make those updates on an ongoing basis, that's great.
But for the rest of us -- myself included -- it's not so straightforward. Sure, we probably -- hopefully -- know roughly how much money comes in and goes out every month without having to look it up. And we have a pretty good idea of what our major fixed expenses like mortgage and car payments are. But everything else? We file it under "miscellaneous."
And that invites trouble.
The danger of "misc."
Here's the problem: When you don't track your spending at all, or at most rely on glances at your bank balance to keep track of things, it's very easy to end up spending more than you earn. A recent survey by Visa USA showed that nearly half of Americans couldn't account for a significant portion of their cash spending, "losing" an average of $2,340 a year. And even if your bank balance looks okay, your credit card balance might not. It's easy to forget that money spent via a credit card is still money spent, especially in the middle of a shopping spree, or when things seem tight.
If you're hoping to be wealthy someday, that's a disaster. Spending less than you earn is the secret to building wealth. Obviously, in order to do that, you've got to have a handle on your cash flow.
At the same time, most of us really aren't up for spending several hours entering every expenditure into Quicken every month.
The happy medium
Fortunately for us, we live in the 21st century. And here in the 21st century, it's actually pretty easy to keep a general grip on your spending. The happy medium between reckless spending and Quickenish micromanagement of every penny is easy to achieve, and it's all most people really need. Here's how to go at it:
- Track your spending for a month. You don't need to capture every penny, but get most of it. Here's a tip that will make it easy: Use your debit card instead of cash whenever possible for four weeks, and the bank will do the tracking for you. For everything else, just stick the receipt in a designated pocket or envelope, and tally them up once a week or so. There are also innovative websites that can track your spending as well.
See where your money is really going. Quicken works beautifully for this, but you can get the essential information almost as easily with a pen, paper, and a calculator. Key questions: Does your spending exceed your income? If so, are you just being a little sloppy, or are you trying to live beyond your means? Is there waste -- like bank fees -- that can be cut easily with a little attention? Banks like Wells Fargo
(NYSE:WFC)and Wachovia (NYSE:WB)make enormous amounts of money off of those little fees -- there's no need for you to contribute if you can avoid it.
- Create a new budget. The key to creating a budget that you can stick to is to be realistic. This is why working backwards from your actual, documented spending is so important. Try to come up with a plan that meets all of your needs in a reasonable way -- without making budgeting feel like a huge (and unsustainable) burden. For more information, you can check out this article.
To learn more about getting your financial house in order, check out the Fool's Budgeting discussion board as well as these articles: