Where Do We Spend Our Money?
by Gary Foreman
Mary and John Smith knew that it was time to get their expenses under control. Each year their income went up, but each raise just seemed to disappear. They had decided that it was time to learn what was really happening with their money.
The plan that they had conceived was simple. They had decided that if they knew what they had spent the last six months, they could make a reasonable estimate of the entire year. So Mary and John had check register and all their credit card bills for the last six months collected and sitting on the kitchen table.
They had talked about what categories they would use. Housing had four categories: mortgage, maintenance, insurance and utilities. Auto was similar: car payments, maintenance and insurance. Medical had a category for each member of the family. This would include both medical and dental. They also had a category for medical insurance.
They had decided that a general category would be needed. That would be divided into entertainment, gifts and miscellaneous. Clothing was another heading that included a category for each family member. Naturally they would need a heading for food and groceries. Although they decided against it, they had talked about having a category for each store. They felt that they didn't need to know that, but you might think that it's valuable information.
Both of the Smith children were older so they didn't need a category for child care, but if you have those expenses you'll need the category. For the Smiths, a category for education was needed. Both John and Mary took continuing education courses.
Life and disability insurance were placed under another heading. These expenses were deducted from their paychecks so it would have been easy to overlook them.
There was also a category for savings. They used company sponsored 401k programs for savings and added additional savings whenever they could.
Taxes were broken down into categories for federal withholding and social security. If they lived in a state with an income tax, they would have needed a category for that, too
They also had a category for contributions. John and Mary were both generous and felt that they should share some of their blessings.
Finally, they had a category for cash expenditures. They used cash to buy lunches and some miscellaneous stuff. They agreed that if the amount in cash was significant that they would go back and figure out where that money was going.
The list that the Smiths had generated was geared to their family. It covered all the major areas where they spent money. The categories weren't so precise that they could pinpoint every expenditure. Yet, if an amount seemed unusually high or low, they could find out it's source with relative ease. Your list will probably be similar to the Smith's in most cases with some additional categories that are more pertinent to your family.
Mary had set up a spreadsheet in her computer to record the transactions, but you can do the same thing with a sheet of paper.
She began by going through their checkbook beginning with January 1st. She chose the most appropriate category for each check. Some checks needed to be split among two or even three categories. On some she needed to consult with John since he had made the purchases.
The only checks she skipped were the ones made out to pay credit card companies. There she went directly to the credit card statements. She used each individual charge from the statement as an entry on her sheet. The Smiths made it a habit to pay their credit card bill completely each month, but the method would work even if they only paid part of the total due. If they had accrued interest charges, Mary would have needed a category to record them.
When they were through with the credit cards, John began to work through their payroll stubs. Each deduction was added to their sheet since each represented an expense even if they didn't have to write a check to pay for it.
The whole process took a few hours, but it really wasn't hard work. On a few items they discussed what category fit best. They decided that the most important thing was to be consistent and put the same type of expense in the same category each time.
Once they had completed the six month record they totaled each category. They remembered that their real estate taxes weren't included, so they made a special entry for that and any other annual expenditures that weren't within the six month period.
Then they began to make adjustments to bring their expenses to a yearly basis. For most categories this was simply multiplying the total by two.
But for some categories, adjustments needed to be made. Since they bought most of their Christmas presents using credit cards all those expenses showed up in the January bills. They guessed that they probably bought about 3/4 of their total gifts from January to June. So they only added 1/3 of the six month total to arrive at an annual figure.
Finally they were able to add all the expenses together to get a grand total. Although the total was about what they had expected, some categories earned a raised eyebrow.
John and Mary completed the exercise by calculating what percentage of the total each category consumed. To do this they simply divided each category's total by the grand total.
They had accomplished their goal. Now the Smiths had a good idea of how much they were spending and where it went. They also had a percentage that they could use to compare their family to other similar families. The expense sheet could be used to quickly identify categories that were unusually high and could be candidates for potential savings. Finally, they could compare their spending with their income to know if they were living above their means.
It wasn't that difficult or even that time consuming. But in one morning, the Smith family had taken the first significant step toward gaining control of their finances. They were proud. And rightfully so.
Debt from my past is preventing me from saving for my future! Tell us: Yes, debt is hindering my ability to save! or No, debt is not a problem but I am trying to get ahead financially!
Gary Foreman is a former financial planner and purchasing manager who founded The Dollar Stretcher.com website and newsletters in 1996. He's been featured in MSN Money, Yahoo Finance, Fox Business, The Nightly Business Report, US News Money and CreditCards.com. Gary shares his philosophy of money here. You can follow Gary on Twitter or visit Gary Foreman on Google+. Gary is also available for audio, video or print interviews. For more info see his media page.