The first step to gaining control of your money

Have 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!" Marketers and retailers are very, very good at helping you part with your money with minimal effort on your behalf. The saying goes that knowledge is power. Knowing where your money goes and what you spend your money on gives you the power to make informed decisions when it comes to your money, spending it and saving it.

Tracking expenses

To get an a good idea of what you spend your money on and how much you have left over at the end of the month, keep a record of all your expenses. This means jotting down somewhere every cent that you spend in a month. 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

• The easiest way is to keep a small notebook handy and every time you pull out your wallet, jot down what you are buying and how much, no matter how small an amount it is. It’s amazing how easy it is to forget what you spend. Buying a cup of coffee? Jot it down. Spending money on eBay? Jot it down. Buying something on the credit card? Jot it down. Otherwise, make a quick note when you get home. To make it easier:
  • Keep all your receipts to remind you of what you have spent that day. Ask for a receipt if you need to. For example, my greengrocer prints a receipt and throws it in the bin unless you ask for it.
  • If you prefer technology, use your mobile phone, laptop, excel spreadsheet instead of the old pen and paper method.
  • Write down what you spend as soon as you can. Trying to remember what you spent days ago can be difficult.
  • Don’t forget automatic payments from your bank accounts and credit cards, rent, mortgage payments, loan repayments, insurance, charity donations, you want to get a picture of exactly where your money goes. Don’t include ATM withdrawals or credit card repayments – track spending as you spend it.
• Don’t forget to get your family on board. Make it an exercise in information gathering, not a blame game. If this is mission impossible, include a “partner expense” category.
• To analyse your spending patterns, group your expenses into logical categories and calculate the totals. If you are familiar with excel, this makes the job quick and easy, otherwise, add them up on a bit of paper. 
• Grouping your categories under two headings essential spending and discretionary or optional spending gives you a clearer picture of how you spend your money. What goes in these two categories will be different for everyone, but generally expenses such as food, housing and utilities go in essential spending, the rest is discretionary.

• Calculating in excel makes this exercise a breeze. You may want to be a bit more specific than the above example, but you get the idea. The more specific you are with your spending categories, the more you can narrow in on where you can make changes to your spending habits.
• If  you want to see how you went cash flow wise for the month, work out your income for the month (the net income, don’t include tax or other expenses deducted). Add it to your workings and deduct your total expenses. Income less expenses = what you have left over at the end of the month (or how much you over spent if it is negative!) It should look something like this:

By tracking your expenses, 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.

The Cheats Method To Budgeting.

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. If you want to save money and reduce your spending, the best place to start is looking at discretionary spending. 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. Many things that we think are essential are often not. Going off your bank statement, you may be able to break down some of your spending into more specific categories.
• If you take away your necessary spending from the total amount that you spent the remaining is "discretionary spending", spending that you can live without if necessary.
• 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 can cut back.

Now that you have an idea of your spending you can work backwards too. Work out your essential spending. Add to this savings amounts that will be automatically deducted 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

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

• 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 the month.
• Deduct this amount from your closing balance 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 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.

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. 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, or 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.