the first step to gaining control of your money

dreamstimefree_3008255Have you ever got to the end of the week and thought, ‘where did all my money go? I was sure that I had a fifty in my purse only yesterday!’

Yeah, me too.

Marketers and retailers are very, very good at helping you part with your money with minimal effort on your behalf. That’s their business and they’ve been in this business for a very long time.

We, on the other hand, have little training when it comes to money management. So how do you fight the retail strategies and keep your hard earned money in your pocket?

They say that knowledge is power. Knowing where your money goes and what you spend your money on gives you the power to control your finances.


Tracking expenses

The best way to work out what you spend your money on and how much you have left at the end of the month is to keep a record of all your expenses. This means jotting down every cent that you spend in a month and categorising or organising it.

Tedious and clichéd advice, I know, but I can guarantee you will be surprised at the result. It’s amazing how quickly small amounts add up.

Track your expenses for a month

  • Make the task of tracking your expenses easy by keeping a small notebook (or this printable tracker) in your wallet so that you can jot down expenses at the time of purchase. It’s amazing how easy it is to forget what you spend. Buying a coffee, spending money on eBay? Picking up the dry cleaning? Jot it down.
  • Keep all of your receipts to remind you of what you have spent. Ask for one if you don’t get it. My greengrocer throws the receipt in the bin unless I ask for it; Woolworths has now stopped giving receipts automatically.
  • If you’re a technophile, use your mobile phone to record your expenses.
  • Don’t forget automatic payments like mortgage repayments, debt repayments, insurance, fees, charity donations etc.
  • Get the family on board. Make this an exercise in information gathering, not a blame game. If this is mission impossible, create a ‘partner’s expenses’ category.

Categorising your expenses

Next, you will want to organise and categorise your expenses to make sense out of them. You can do this during the month, or at the end.

I’m a fan of using an excel spreadsheet to track my expenses (you can find a bunch of excel tutorials for this here), but pencil and paper work just as well.

Here’s an example of expenses for a month. You may like your categories to be more specific than this one, do what works for you. Remember, this is an exercise to help you gain control of your finances, so the right way to do it is the one that works for your circumstances.

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Click to enlarge.

You can take this one step further and analyse your cash flow for the month. Your cash flow is your net income (what you actually get in the bank, ignore tax etc) less your expenses.

Simplistically put, if you have spent less than you earn, you have a positive cash flow and your savings increase. Conversely, if you spend more than you earn, you have negative cash flow and you go deeper into debt.

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Click to enlarge.

By tracking your expenses this way, you can say with certainty where you spend your money every month and it gives you the knowledge of where you can cut back if you need to.

It is with this information that we start building a budget.

The cheat’s method of tracking expenses (I don’t recommend this)

I recommend you try the above method rather than "cheating". Tracking exactly what you spend is the most empowering method. The devil is in the detail. However, if you want a quick start into getting on top of your finances, the cheats method is a good place to begin.

  • Look at your bank statements and credit card statements and add up your total spending for the month. Include debt repayments and credit card payments but ensure that you only count them once. Also include amounts that you withdrew at the ATM. This is the total amount of spending for the month.
  • As above, write down all your essential spending for the month and add this up. Be ruthless. Only include things that are really necessary. These expenses will include rent or mortgage, groceries etc. These expenses are often easiest to pick off your bank statement.
  • If you take away your essential spending calculated above, from the total amount that you spent (from your bank statement) the remaining is ‘discretionary spending’.
  • Now look at how much you earned this month and deduct your expenses from your income. Is your spending more than what you earned or less? Are you covering the necessities? If you are spending more than you earn, I suggest tracking your expenses specifically to find out exactly where you need to cut back.

Now that you have an idea of your spending you can work backwards to create a savings plan. Work out your essential spending. Add to this a savings amount that you can automatically deduct from your bank account each pay to cover extra bills, holidays, investments etc. You can spend the rest with reckless abandon knowing your expenses and savings are covered!

The really quick and dirty method (if you really must)

A quick and really rough way to work out if you are spending within budget is have a quick look at your bank statements and credit card statements and:

  • Write down the opening balance for the month of your bank account. If you have more than one, add the opening balances together. Round to the closest dollar to make it easier.
  • Work out your closing balances for the month in the same manner.
  • Now look at your credit card statement. Look at the total expenses for the month including interest and fees, ignoring any repayments. If you have more than one credit card, add together spending on all credit cards for that month only.
  • Add your credit card spending amount to your closing bank balance(s) amount.
  • Deduct your total (closing balance and credit card expenditure) from your opening balance. (If you started in the negative, then you will need to add your total closing balance.)
  • If you have less than what you began with then you have spent more than you earned. If you have a negative figure then you have gone into debt. (Of course, if you are in negative and have an amount outstanding on your credit card, you are already in debt.)

An example:

On the 1 August Rachael has $425 in her bank account and $1,200 in her savings account. Altogether she starts the month off having $1,625. On the 31 August Rachael has $470 in her bank account and $1,200 in her savings account, a total closing balance of $1,670. Looking at Rachael’s bank account it looks like she has spent less than she earns and has saved $45 for the month.

Now let’s look at her credit card statement. Over the course of August, Rachael spent $563 on her credit card including interest and ignoring any repayments (these were already taken care of when we looked at the bank statement). If we take this away from Rachael’s closing balance of $1,670, then take off the $1,625 that she started with, then she has actually spent $518 more in August than what she earned.

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Rachael’s Example. Click to Enlarge.

This does not show Rachael what she spent her money on, although she will get an idea from her statements. What it tells her is that she needs to reign in her spending so that she does not go further into debt and so she can reduce her outstanding debt and increase her savings. It doesn’t tell her specifically where she can make changes.

When embarking on the frugal life, knowing what you spend your money on is an essential first step in gaining control of your finances. As you go, you will want to refine this process, getting more specific on your spending and evolving it into a personal budget, using it to plan for your long term goals and track your progress. Rather than being tedious, stifling or boring, it is the path to freedom when it comes to your financial control.

Please feel free to leave a comment or question.

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