Posted by Lending Club :: December 20, 2008 @ 6:31 am

This is the second article in a series teaching you how to develop a perfect, personalized spending plan for yourself. Take a look at the first article for an introduction to the series. This spending plan is modeled after the spending plan concept presented in the best-selling personal finance book, Your Money or Your Life. In today's post I'm going to explain how to complete one of the basic elements of the system: tracking your personal spending.

Why would I track my spending?

Keeping track of your spending serves two goals: first, it helps change spending into a more conscious act, and second, it gives us data with which we can create our spending plan. By writing down all of our spending, we have to think about the money we are spending as we are doing it. Entering the amount of money you spent for lunch, for example, into your notebook allows you to compare it immediately to all of the other purchases you've made. The act of taking out the notebook may actually make you reconsider spending in the first place. When I began tracking my spending, I refused to spend a single penny without immediately pulling out my notebook and writing down my purchase. Often, this made me reconsider my purchase; I would ask myself, 'Is buying this item worth the effort of pulling out my notebook and pen?'

Secondly, by tracking my spending, I was able to look at how much money I’d spent in each category at the end of the month. We'll be talking about this in the next article, but having a list of how you spent your money lets you determine whether your spending was worth it and customize your plan to your current spending habits.

How?

Tracking your spending is simple: make sure you have a list of every single penny you spent (it's best to keep track up to the penny, because you will have a very accurate list – but if you want to track to the nearest dollar, that's probably okay, too). Every entry has a few parts: take a look at a sample one from my notebook:

11/11/08 - Modena Cafe, double coffee and croissant, AR$8.50. Food/Drink, Lunch

I have the date, the location, the items, the price (the price is in Argentine pesos, not dollars – that's what the AR$ means). Then I wrote down the category: Food/Drink, Lunch. I also have a different category for dinner, for grocery shopping, for electronics, and for everything else. You can make up your own categories.

I use a pocket cahier Moleskine notebook because it's small enough to carry in my pocket. Then, every couple of days, I sync my list in my notebook with Quicken, the personal finance software, so that I have a digital copy of my spending habits.

You can also use iPhone apps (like Pennies), but I like to write. I'm considering moving to an iPhone app so I won't need to manually sync my notes, however.

Make it a habit

It's important that you begin doing this every morning. Carry your notebook along with you and mark in every single expense during the day. It's easy to buy something and just say 'I'll write it down when I get home,' but you will almost certainly forget how much money you spent.

Once you've done this process for a month, you will have a large set of data regarding your spending habits, differentiated by categories. You can see exactly how much you spend on different things, every day. In the next article in this series, I'll tell you how to turn that monthly list into a spending plan – and how to become happier and at peace with your spending habits and the state of your personal finances.