Thursday, February 21, 2008

Where Are You Spending Your Money?

How much was that?
This is one of the more basic questions you need to address as you move up the financial maturity curve. Only two categories of people are exempt from this exercise – the super rich and the super na├»ve. For the vast majority – this is a pertinent question since it starts the process of understanding where your money is being spent. Ultimately – if you don’t know what the problem is, your ability to change that situation is very limited.

In the financial game, first you understand where your money is going. Then you limit your expenditure by trying to box spending using a budget. Then you review periodically to match your spending with your budget. Not an easy endeavor but when you get close to matching spending with your budget, then you have achieved – visibility and control over your spending.

Here is a simple approach to track your spending.
  • Download last months transactions(credit cards, checking account, debit card, ATM …)
  • Create a fixed set of categories to track your spending (mortgage, grocerices, gas, utilities ...)
  • Associate a category to each transaction
  • If unsure about the expense – mark as misc and move on

If you can track data for the last 3 months (most sites allow you about 90 days worth of data download) or 6 months or even a year – great. The more data you can start with, the better visibility you will have into your averages and thereby your spending habits. But start with the last month – if that is all you have.


The big question is – how many unaccounted expenses (the misc category) did you have? Could you account for all the ATM withdrawals, all the credit card transactions, all the checks you wrote? If your misc category is minuscule or you are tracking almost 99% of your expenses – kudos to you for knowing where your money is being spend. If you are having a tough time accounting for a significant chunk of change – that is what you don’t want.


So what have you uncovered? Unknown expenses that you did not even know about. These are expenses with a very short-term benefit. Tackle these by being more diligent in tracking your expenses. Limit your cash expenses and if you have to spend cash – track it. Keep your checkbook up to date and keep track of your bank statements. If you dedicate a couple of hours each month-end to tally up your various bank statements, cancelled checks and receipts – you will have high accountability of your monthly expenses. Over time, the expense gaps should reduce where you have a high degree of visibility into your spending space. Ideally, your misc category should not exceed 1% of your total spending.


The budgeting, trimming and savings start once you know where you are. Plan your next steps and streamline your finances but always be grounded in reality. Do you know where you are spending your money?



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3 comments:

Jack Payne said...

Your treatise on spending controls sound much like the same stuff I was writing 35 years ago. Viable, doable, timeless. And, you do a great job of pounding home this point.

Mark Runta said...

Jack -

If more people followed these timeless financial strategies, we would not have some of the financial challenges currently facing the US. Thanks for your support.

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