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.

Whether you completely enjoy or dread every minute of managing your finances, at some point we are all susceptible to what I call financial fatigue. Recognizing the warning signs and taking preventative measures can help you to make it through such a period.

Financial fatigue is when you’re tired of managing your finances. It can come about for many reasons, but here are a few common ones and how to deal with them:

Managing your finances becomes tedious

The level of detail to which you manage your finances can vary widely. If you feel unmotivated and the task seems tedious, try managing with less detail. The change can be temporary or permanent, depending on your comfort with the new system. As an example, if you’re tired of tracking every penny you spend and entering it into a detailed budget, then try a simpler approach like The 60% Solution, which we mentioned previously here on the Lending Club blog.

Your efforts seem hopeless

In order to stay motivated and manage your finances properly, seeing some progress goes a long way. Doing the work without seeing any results can get old in a hurry. First of all, ensure that you’ve given your efforts the time to generate results. You can’t expect small changes to have big results overnight. If you’ve given it sufficient time and still aren’t seeing results, see if setting short-term goals helps. For example, completely eliminating your debt is a worthy goal, but trying to reduce it by a certain amount each month will give you many small successes along the way rather than one large one at the end.

Other life events take priority

Even non-tedious management of your finances where you are making good progress can take a back seat when other, more important events come along. If you wait too long before resuming things, the task may become overwhelming. Automating as much of your finances as possible will help to eliminate this potential problem. By reducing the amount of manual effort required, your finances will continue to be managed smoothly with little or no effort on your part.

All of us will face times when we get tired of managing our finances. By simplifying our techniques, setting short-term goals, and automating as much as possible, we can limit the occurrence and duration of financial fatigue.

What other methods have you used to deal with financial fatigue?

There are many times when it’s advantageous to invest, but here are four common ones. Depending on which you encounter, and your situation, the best type of investment could be found in the stock market, purchasing notes on Lending Club, buying a stake in a business, or even a more exotic option.

1. When others are afraid or unable to invest

Among the many famous quotes of Warren Buffett is the gem to “be greedy when others are fearful and fearful when others are greedy.” Though investment fear is lower than it had been a few weeks back, significant fear still remains. Now may be the time when the seeds that grow into the riches of tomorrow are sown. The time when you (and others around you) seem least able to invest may be exactly the time to do so.

2. Before a planned reduction in income or increase in expenses

Investing as much as possible when you are able to may help to offset those times when you are not. A good example of both cases is if you are expecting a child and plan to quit your job to provide care when the child arrives. The child will certainly raise expenses and quitting your job will obviously reduce your income. Investing as much as possible before those events occur is likely much better than hoping to be able to make small investments after they occur.

3. When a recurring expense ends

If you have a recurring expense, such as a car payment, investing that amount once the car is paid off should be easy. You will have grown accustomed to living without that money each month, so your standard of living will remain the same. With no change on your part, you’ll transition the allocation of that money from a depreciating asset to one that has the potential to appreciate significantly.

4. When investing offers the highest relative return

Though higher returns invariably carry higher risk, there are times when the risk/reward relationship tilts in your favor. In other words, sometimes twice the return can be achieved without doubling the risk. When surveying all of the potential ways to use your money, opportunities may present themselves that make the decision to invest an easy one.

How many of these apply to your own situation? What other advantageous times have you found to invest?

Looking at your bills every month, I'm sure you have the same thought as everyone else: "I'm never going to pay this off!" When you have several bills, each with its own balance and interest rate, it can begin to feel like you won't ever be able to beat them all. However, there are some strategies that can help you conquer your debt. One of the best strategies for dealing with multiple bills and credit card payments is the “debt snowballing” method.

What is it?

Debt snowballing is a recent strategy for beating debt, but it is so popular that there is even a Wikipedia page on the subject! According to Wikipedia:

"The debt-snowball method of debt repayment is a form of debt management that is most often applied to repaying revolving credit — such as credit cards. Under the method, extra cash is dedicated to paying debts with the smallest amount owed."
It seems so simple! All you do is pay extra cash to the bill with the smallest balance! Well, that's not quite it...

How does debt snowballing work?

The Wikipedia definition offers one half of the process of debt-snowballing. The way it works is very simple: 1) Pay off your smallest bills first and 2) use the extra money you have left over from the smaller bills to pay off the next biggest bill.

In this way, you start with the smallest problem – the smallest bill. You quickly pay it off as fast as you can (while still continuing to make the minimum payments on all of your other bills). Then, as soon as you've paid off that small bill, take that money and apply it to the next largest.

Why does it work?

Debt snowballing works because it plays on human psychology. Yes, you're paying the same amount for your bills each month, but your bills are disappearing one by one. And as each bill is paid off, the amount you contribute to the larger ones snowballs into a larger bill payment. After paying off your first few bills, you will have a lot more cash to pay off the larger ones!

Some extra reading

Check out Trent's post at The Simple Dollar on how he sees debt snowballing. Also, take a look at this calculator to see how debt snowballing might work in your situation.
Have you tried this strategy before? Has it worked for you?

Give a little at Christmas, if you have anything left to give.

No doubt all of us would like to put on our best Bill and Melinda Gates hats (the derby and beret, as it were) and give generously to charities of our choice. But let's get serious. Nowadays it is hard enough to scrounge for $4.00 milk. Giving to charities has got to come secondary to soaking our Cocoa Puffs.

But should it?

One of the most recognizable persons around Christmas time, after Santa Claus and Frosty the Snowman and Matt Lauer, is that of the Salvation Army bell ringer. Every Christmas he faithfully rings his bell and makes sure-fire eye contact outside of stores and malls nationwide. He is a staple of the holiday season. Yet for some reason, I figured he would have taken this year off with the economy the way it is. But no, he is still outside of my favorite Best Buy, braving the cold for my pocket change. The spending habits of Americans may have changed, but the persistence of the Salvation Army bell ringers has not. Which begs the question: who is giving to him?

To be honest, it is not me. I'll gladly hide behind the excuse of my ATM/debit card as a reason why I have nothing monetary to give (on that note: I hope they don't set up credit terminals strapped to those red pots next year). And I'll gladly find the most circuitous route around the bell ringer so as to minimize my own internal struggle between charity and Charlie's Angels 2: Full Throttle.

And I know I'm not the only one Scrooge-ing it up outside of Macy's. I've seen all different styles of donation avoidance. There is the fast walker, the fake cell phone talker, the apologetic "Sorry, no change" guy, the couple who sneaks in behind someone who actually put money into the kettle pot. If there are so many of us not giving money to the Salvation Army guy, then one has to wonder who is. Even more, what about all the charities that exist in places not in our immediate path to the mall? The Salvation Army is just one of thousands. I'm pretty sure I can't use the debit card excuse on all of them.

With money being tight, many different charities are struggling to stay afloat. There are soup kitchens that are running out of soup and care houses that are running out of clothes. When the economy goes down, the giving of others goes right down with it, and that ends up hurting the people and businesses that depend on that help.

So what is a money-wise consumer to do? If citizens were to succumb to every noble and virtuous opportunity that came across their path, there is no chance that they could feasibly support or reply to each one. People are doing what they need to do in order to survive in a tough economy, and it seems like charities are one of the places that we have deemed expendable. But take a closer look at the budget or the expenses, and there is a good chance that you can find something extraneous or unnecessary. We might think that we have scrimped and saved down to the last penny, but that is usually because we are considering necessities to be those things that are not necessarily necessary.

That's one way to find a little extra to give away this Christmas. Here's another: go without a certain something around the holidays. Perhaps your budget really is pared down to the nitty-gritty, and there is no room for so much as a RedBox of a splurge. In that case, if you really feel that giving is important, maybe it would be appropriate to sacrifice something of your own so that others can benefit. For instance, if you depend on a weekly meal out at a restaurant, try dining in for the month of December and sending the saved cash to a local shelter or stuffing it into a Salvation Army pot (so that other, less charitable people can sneak past behind you, naturally). What a blessing it would be to think of others before yourself this holiday season, and what a lesson it would set for others.

One of the best solutions on how to solve the giving situation is to give of yourself and to give of your time. Take money out of the equation completely, and you still have plenty of ways that you can spread holiday cheer to others. Too often we associate charity with writing a check or dropping change in a jar; meanwhile, places could just as easily use a helping hand as they could an Alexander Hamilton. Don't believe me? Head on down to a soup kitchen and stand back in amazement as volunteers scurry back and forth at a frenetic pace doing the work of three people. Actually, don't stand back. Get in there and help. Standing would be pretty rude.

The only problem with this plan is that we will actually have to get our hands dirty. Ew. A lot of times, sending money is easy because you can end the relationship with a stamped envelope. Once the check has been written, you're done. Not so with volunteering. You are putting your time and energy on the line, and you run the risk of building relationships and impacting people's lives. Think about it: instead of buying the paint, you'll be the one applying the paint. And you're sure to find the experience all kinds of rewarding.

There is no better feeling than to know that you have made a difference in someone's life. And there is no better time to make a difference than around the holidays. If you're not sure where to start, try searching online for charities in your area or asking your local chamber of commerce or a local church for ideas. The opportunities are out there, you just have to want to go find them.

You may not have money to spend on charity this holiday season, and that's alright. That Salvation Army bell ringer is sure to be back next year. But you can find other ways to give, and I guarantee that it will make brushing off the Salvation Army jar a whole lot easier.