How to Know Where Your Money Goes
Two months ago I was talking to a friend who goes out a lot. He is never home. He was saying that all of the money that he makes is gone by the end of the month. Sometimes he even had to put two or three days’ worth of expenses on a credit card. I asked him if he knew where his money went each month. He told me he knew about the big expenses, such as his rent and car payment. After that he wasn’t sure.
One of the first steps in taking control of your finances is finding out where all of your money goes in real dollars and cents. Information is how you can control your money better and make sound decisions. In my last post, I suggested that one way to do this is to sharpen your awareness of the real value of money by paying for everything in cash for a month. There are other ways to find out where your money is going.
If all of your purchases are electronic, using your credit card, debit card, or online bill pay from your bank, you can use software to help you track your spending. Most banks allow you to download your transactions in either MS Money or Quicken format. No matter what tool you use, we here at Lending Club believe that understanding your spending behavior is a critical first step to budgeting, sticking to a financial plan, and ultimately strengthening your credit record.
To get an idea of where your money is going, you’ll want to look at your transactions over a two-month period. For an even better picture, collect the transactions for at least six months to a year. This process will reduce the impact of one-time expenses, such as a car repair.
If many of your transactions are cash-based, you will need to find a different way to track your transactions. This could mean using a small notebook or your Blackberry. You will want to keep track of the date, amount of purchase, store and expense category. Examples of categories are food, transportation, living expenses, entertainment, etc. At the end of a week or month, transfer this data to a spreadsheet. With a spreadsheet it will be easier to make charts and keep the transactions for the long term.
When my friend started to keep track of all his financial transactions, he was able to find out exactly where his money went. Knowing this information, he cut down on going out and made some other changes. This exercise allowed him to reign in his spending and catch the train to a better future.
Wednesday, July 18th, 2007 at 6:39 pm