Many people don’t create budgets because they don’t know where to begin. But there is a practical, doable strategy for moving forward with financial planning – tracking your own spending.
The Coronavirus recession has exacerbated money problems for many in the US and highlighted the pre-existing income gulf. A lack of planning may hit people with lower incomes faster in a crisis – be it national or personal – but financial stability is ultimately dependent on your habits, not your income level. We’ve all heard of lottery winners and famous musicians who ran out of money. Is an MC Hammer joke too out of date?
The current situation makes this the ideal time to update your financial goals. You’ve likely already seen a change in many of your habits. How much less have you spent on drinks at bars, car share services and/or fitness classes?
Getting started on planning often seems like the most difficult hurdle. However, the following exercise will help you begin by tracking your existing spending and saving behavior to assist you in creating a realistic personalized plan at no cost.
I have done this with my own spending habits for several years, and it really helps shine a light on my own behaviors. We may think we know how we spend money, but actually seeing and organizing the details will answer questions you didn’t know you had.
I recommend beginning the process below with either last month or the most recent “normal” (i.e. pre-Covid) month of your life. If you haven’t gone to any concerts since March, but usually do, you’ll want to include that information. Ideally, complete this process for months under both situations. The next few months will likely look somewhere in the middle.
1. Start by going through your credit card bills and online bank accounts.
Create a spreadsheet (or write it down on paper) with every expense you paid for a month. If you have receipts, use them to break down different purchases, like food vs. cleaning supplies from the grocery store.
Write down any cash withdraws as cash and go back later to estimate how that money was spent.
Don’t forget annual or semi-annual expenses. Average their cost for the time period they cover (e.g. divide a magazine subscription you pay once a year by 12 months to get the monthly cost) and include that amount.
2. Once you have compiled all your spending, note the type of spending it was. Common categories include housing, transportation, food, health, entertainment, clothing/accessories and animals. You’ll also want to have an “other” category for items such as gifts and any unaccounted cash purchases.
3. Now that you’ve labeled the expenses with categories, group similar expenses, like toiletries or coffee outside the home, together. This method will allow you to combine specific expenses (e.g. over-the-counter medicine) while seeing your total spending by category (e.g. health) at the same time.
We’ve included templates below to help with this organization, but what matters most is doing it in a way that works for you.
4. Take some time to look through what you’ve spent. What does it tell you about your spending habits and lifestyle? Does anything jump out to you? Perhaps you think you usually leave the house prepared but regularly end up buying bottles of water or umbrellas in a pinch.
Everyone’s spending habits are different. Allow yourself to give priority to what matters most to you and create realistic financial goals based on your current situation. You can use the information you’ve learned from this exercise to make spending decisions, and, best of all, you now have specific starting points for creating a budget and a path toward financial stability.
Templates for tracking your expenses:
Instructions included in template.
The Consumer Financial Protection Bureau has this simplified template as well.