Determine where your money is going

Figuring out where your money goes is a great way to jump start healthy financial habits. By examining your spending patterns, you become aware of specifically where your money goes. Inspecting spending patterns also teaches you to build a healthy habit of saving in a routine, automatic way.

Focus on the big picture

The point of a spending analysis is to figure out where all your money goes. If you are already meeting your financial goals, there's not much point in tracking your spending. After all, the important thing is saving money not mastering a tracking system.

Be alert that you can spend a lot of time creating fancy tracking methods. You can also pay out a lot of money on fancy tracking systems. Resist both temptations. This is not about meticulously accounting for every penny that comes across your desk. Rather, it's about awareness. If you get too caught up in the whereabouts of every last penny, you'll waste energy and miss the point. Similarly, if you buy a complex computer tracking program you risk losing valuable time just learning the program.

Tracking your spending

You may not realize it, but a lot of the information you need to analyze your spending is already at your fingertips. Even if you've never actually sat down to compile your financial records, you'll find you already have access to a lot of it. Some of the best sources of information include:

Bank statements
Credit card statements
Pay stubs
Tax returns
Checkbook records

Most bank and credit card statements can be accessed electronically. Many companies even allow you to download your data. If you are computer savvy, contact your bank or your credit card agency to learn how to take advantage of this.

If you prefer the paper versions, that's fine too. In the end it doesn't matter whether you use electronic or paper records. The important thing is how you use those records.

As you compile your spending records, get in the habit of asking for receipts when you make purchases. This is especially important when you pay in cash since cash purchases are not recorded electronically like credit purchases.

If you'd rather not deal with receipts you can consider looking at the cash withdrawals you've made from your bank. Take the amount of the withdrawals and estimate the way you spend that money. For example, if you know you spend a certain amount of cash on lunch every day when you're at work, sum that up and put it in your records.

Options for tracking

You don't need fancy computer equipment to track your expenses. Simply using good old pen and paper will do the trick. However, there are quite a number of good software programs out there for tracking spending, so if you prefer the computer you should give those programs a peek.

Determine a timeline and stick to it

Don't worry about compiling records from years past. Instead, focus on the current year or even just the past six months. It's not a good idea to go much smaller than that because your goal is to have a portrait of your spending over time.

When you decide on your timeframe, be sure you include those months where your spending patterns are different from the rest of the year. For example, the holiday season might be a time with you spend more money on gifts than the rest of the year. Similarly, the summer months may be a time you typically have vacation expenses.

Setting up categories

Your two main categories should be 'income' and 'expenses.' After that, break your expenses category down into 'needs' (those expenses that are necessary) and 'wants' (those expenses you enjoy but ultimately, if forced to, can live without).

Be aware that it's important to provide yourself with enough detail to understand your spending, but you don't want so much detail that you get bogged down. For instance, instead of simply listing 'food' as an expense category, separate it further into 'groceries' and 'dining out'. However, remember that balance is important. Don't be so detailed that you separate your dining out expenses into breakfast, lunch, dinner, dessert, and coffee. You want detail, but you don't want to drive yourself crazy.

General expense categories

Here is an example of common expense categories:

Rent/mortgage payments
Utilities
Water
Gas/electric
Phone/cable/internet
Food
Groceries
Dining out
Auto
Car payments
Gas
Maintenance
Taxes
FICA (Medicare and Social Security)
Federal taxes
State taxes
Medical expenses
Doctor
Dentist
Prescriptions
Household
Furniture
Decor
Entertainment
Movies
Vacation
Clothing
Shoes
Jewelry
Personal care
Haircuts
Makeup

Look for ways to cut back

After putting together your tracking system and plugging in your numbers, the next step is looking for ways to curb those expenses. You don't have to force yourself to cut them entirely, because remember it's important to still enjoy life. But often, there are little ways you can cut back once you are aware of what you're spending.

For example, after putting together your analysis you might be surprised to find you spend much more on gas per month than you would have estimated. If so, think about whether you can walk, carpool, or use public transportation.

Or perhaps your analysis shows you that you put a lot of money into clothes. Where did you buy the clothes ' at brand name stores or discount retailers' Consider trying new vendors who offer the same things for less.

Make a savings goal

After clarifying the small ways you'd like to cut back, set a savings goal. For instance, based on the changes you want to make, say you estimate that you want to save an extra $50 per month. Don't worry if the number seems small to you. The important part is that you will be saving.

At the end of the month when you've met your savings goal, take the money and deposit it in a savings account. Over time, you will enjoy watching that account grow.

A wise move for the long run

An important part of financial planning is being aware of where your money goes. When you are informed about how you use your money, you're more likely to make wise spending choices. As you strengthen this habit and build savings, you will feel empowered and be closer to achieving your financial goals.