While we may know how much money we have coming in, studies show that most of us have no idea what is going out. As we discussed last time, not knowing how much money we are spending each month may put us in a position where we need money that we don’t have. We may end up using credit cards or getting a payday loan to cover the shortfall.
We need to actually monitor our spending habits to find out the best way to maximize our financial resources. The best way to do this is to keep track of every purchase made, regardless of whether you use a check, credit card, or cash. In learning how to prepare a budget, it is important that this is done for two to three months.
Monitoring spending is helpful
This may seem to be a little bit tedious to do, but the results will really help get you on track financially. By monitoring your spending habits, you accomplish two things.
First, you will be able to confirm that your budget is accurate. If your budget calculations are off, then it will not be easy to stick with. Remember, a budget is not meant to be a constraint. You want to have a budget that reflects your actual spending habits.
Second, you will be able to see where you are making mistakes. You will begin to see how those little purchases add up.
For example, I love donuts. Although I try not to eat them too often, there are many times that I’ve bought one or two donuts from the mini-mart when I stopped to get gas. I may only spend one dollar at each stop, but if I do this two or three times a week, that can add $10 to my food budget. If I were to pick up coffee as well, that might add another $10 or $20.
If I did not figure this into my food budget, I would have problems. Since all of our money is supposed to be accounted for in our budget, there is no “extra” money. That means that if I don’t take it from my food category, I am taking that $20 or $30 from another category. This would throw the entire budget off course.
Beware of small, impulse purchases
Small and impulsive purchases like this are usually the reason that our money does not make it through the month. Lots of little purchases can end of eating away a significant chunk of our monthly income, because we don’t really see it happening. The money disappears a little at a time, so it doesn’t hurt until we look at the big picture.
Another good example of this happening is buying lunch every day at work. If we run out and get fast food every day, that can be $5 a day, $25 a week, and $100 a month. If two spouses are doing this, it adds another $200 a month to the food budget.
To make this monitoring exercise easier, it is best to ask for receipts for each purchase you make. In the interim, we keep the receipts in envelopes labeled for each budget category. Then, take time at least once each week to review those receipts and tabulate the totals for each category.
After two or three months, you have much more information to work with and are better able to find trends in your spending habits. Then, it will be easier to make any adjustments that are necessary to make your budget accurately reflect your spending lifestyle.