Posted by Julian Ramirez :: July 19, 2007 @ 11:38 am

Creating a budget is a great way to become aware of your spending habits and identify where you might be overspending. Too often, we only check up on our spending when our bank account balance is lower than we would've thought. We all make lots of little purchases that we may forget about: Tuesday's lunch, a couple drinks with some friends, a new CD, a poster, a magazine. These purchases add up, and banks are depressingly good at keeping track of them even if we aren't.

The best way to track these expenses and control spending is to create a budget. There are plenty of websites with information on how to start a budget, complete with spreadsheets to help you categorize your spending. Examples include Pear Budget and Get Rich Slowly.

Once you have created a budget, anticipate your daily spending and then focus on sticking to your plan. For many people, the small everyday purchases add up and can be detrimental to a budget, such as food and impulse buys. There are two common ways to help you control day-to-day expenses: either use only cash or only credit/debit cards. Both methods have their advantages and the best choice depends strongly on your personal spending habits.

As was noted in a previous post on this blog, using an all-cash system for everyday spending is the easiest way to keep track of your spending and realize the true cost of things you purchase. If you have a history of convincing yourself that you need something, only to regret or forget about it later, then a few months on an all-cash basis could greatly benefit you.

With the cash-only approach, you can see how much money remains in your wallet. Plus, having to hand over the physical money helps solidify the final cost of the purchase. This is a very helpful strategy for people who are just starting to get a grip on their spending and may need to double-check the validity of their budgets. However, it is necessary to retain all of your receipts in order to track your progress.

The benefit of using only credit/debit cards is that you receive statements listing all of your expenses. There are many sites and services that help you keep track of and categorize purchases. The credit/debit card approach is best for people who already have a solid understanding of their spending habits and can look at monthly statements and remember every purchase over $20. Wesabe and Geezeo are two great sites offering tons of free tools to help you visualize your spending habits over time.

Ultimately, keeping track of day-to-day spending is a personal choice. There is a delicate balance to negotiate: if your money is either too easy to access or too hard to track, it’s much less realistic that you will be able to stick to your budget. Whether you use one of these two methods or apply your own strategy to track your spending, we here at Lending Club recommend any method that will help you to better understand where your money goes.