According to the National Bureau of Economic Research, America has been suffering through a recession since December 2007. As people go cold turkey on credit and struggle to put their households on a cash basis, the first thing most of us need to do is spend a month finding out exactly where our money is going. Without an expense tracking baseline, it’s impossible to:
- realistically cut expenses,
- address accrued debt,
- develop a workable budget,
- or factor in a way to save or invest even a small amount each month.
Tracking your money can be as simple as noting all expenditures and adding things up at the end of a month or as sophisticated as working up a spreadsheet on your PC, or using inexpensive dedicated programs on your iPhone or iPod Touch. But you have to record everything. (Remember that the act of observing a thing changes that which is observed, so simply by watching how money leaves your hands, you’ll begin to change.)
After vigilant recording, the next most important aspect of expense tracking is meaningful categorization. What are the bills you have to pay every month? (Think mortgage, electricity, water, gasoline, rent, and the like.) These are the commitments that must be met before all others. (If you have credit card debt, be sure to include minimum payments as regular monthly bills.) Label such items “utilities” or “monthly.”
Develop categories for household expenses and separate out groceries. And don’t neglect to get a hand on those little mindless, discretionary purchases we’re all guilty of making. If you buy a piece of gum, write it down or record it in whatever piece of software you might be using.
At the end of the month when you look at the totals, highlight places where you think you can lower the numbers. For instance:
- Electrical – Do you have to have the lights on in the living room when you’re sitting in the kitchen? Do you have phone chargers and other vampire devices that suck wattage by staying plugged in unnecessarily? Have you changed your old style bulbs to efficient compact fluorescent bulbs?
- Water – Are you waiting to run the washing machine until you have a full load? Do you turn the water off when you’re brushing your teeth? Can you shorten your showers?
- Groceries – Are you using coupons? Availing yourself of in-store “reward” sales? Buying store brands instead of name brands? Making a list and avoiding impulse buys? Planning your meals a week in advance and buying accordingly?
- Entertainment – Are you buying books or checking them out of the library for free? Does your library also offer DVDs? Do you know what free events are being offered in your community this month? If you let yourself eat out once a month, have you investigated lower price, funky eateries that will be fun and less expensive?
Even before you are absolutely certain about where your money is going, put away your credit cards. The only way you can get on top of existing credit card debt is to stop charging and if possible, make double the required minimum payments each month.
And what about putting something away? At first you may not be able to do much, but anything is better than nothing. Try to find a savings account that earns at least 2.5%. (Try online banks like ING Direct, which currently offers a savings account at 2.75%. They’re always looking for depositors and they’re FDIC insured.) Set up an automatic withdrawal from your bank account. Try starting at $10 and in six months increase that amount.
Make no mistake, most Americans are in the hole and used to saying “charge it.” Changing means breaking poor, ingrained financial habits. Only by recording how you use money and competing against yourself to spend less and save more will you begin to see progress. The days of going straight to the car loan calculator are over for the time being. Figure out how to save now and look forward to the spending you will able to do in the future when you can afford whatever it is you want.
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