This article is part of our 12 Keys to Lasting Wealth Series – (Key 1: Avoid Lifestyle Inflation).
If someone asked you how much you spend a month on clothes, would you be able to tell them?
Do you know how much you paid for groceries last month?
How much money did you hand over to your credit card company in interest charges or pay to your bank in fees?
Truth be told, most of us don’t really know.
Yes, we’ll able to venture a guess at how much we’ve spent on groceries, gas, or the lighting bill, but in most cases these guesses are wildly inaccurate.
The key to wealth building: Spend less than you earn and invest or pay off debt with the rest.
Yet it’s almost impossible to live below your means if you don’t know how much you’re spending in the first place. It’s like walking in the dark. You’re bound to get hurt eventually.
By tracking your spending you’ll easily determine whether you’re falling deeper in debt each month or making some financial headway. Furthermore, you’ll get a crystal clear picture of where you can cut costs to come up with the extra money needed to pay off debt, save, or invest.
You can use our Financial Tracking Sheet to help track your expenses.
It’s easy. Best of all you’ll be taking the first step to financial freedom. You’ll need:
- Receipts from purchases – Place an envelope in your wallet or pocketbook. Use it to collect all the receipts you receive.
- Credit card statements
- Bank statements
- Utility and other bills
- Mortgage and other loan payment books
- Last year’s IRS and state tax returns to determine how much of your salary you actually bring home.
For many expenses like your property tax and health insurance you’ll have to divide the yearly bill by 12 to determine how much these items are costing you on a month to month basis.
Once you have the monthly amounts for each expense category on the Financial Tracking Sheet, total up all your monthly expenses.
Now determine your monthly salary by using your IRS tax return statement and dividing your yearly take home pay by twelve.
You can now compare your monthly expenses with your monthly salary to determine how you’re doing financially.
If you find yourself falling behind each month take a look at your expenses. See where you can cut back.
By knowing what you spend and where you spend it, you’ll have taken your first step toward financial freedom.
In the next post we’ll took a look at ways we can slay our lifestyle inflation demons.
Once we understand the true nature of wealth we can start making our money work for us instead of against us.
Personal finance is about more than math. It's about behavior. Change your behavior and you change your financial situation.
When we spend money we're really exchanging time spent on the job (our life energy) for a product. Understanding this leads to better buying decisions.
Put your finances back on track with Michelle Singletary's twenty-one-day financial fast.
{ 3 comments… read them below or add one }
I learned how to do track my spending 2 years ago and its the best thing I ever did. Its important to know where your money is going and be able to give every dollar a name. Last year by tracking my spending I found out I had spend 2,000 in cell phone randomness. I almost passed out!!. the good thing however was that I was able to fix my mistake change carriers and STOP the ridiculous spending.
I think a lot of people are afraid to know what they are spending money on because it exposes how frivolous we are with money. I say deal with the truth because thats half the battle!!
$2000 in cell phone bills!!!!!!
I know you’re glad you noticed that. Think about how many extra hours you had to work to come up with $2000 =)
I wish to express my respect for your generosity in support of those individuals that require guidance on that niche. Your real dedication to passing the message across ended up being exceedingly significant and have always allowed people like me to attain their objectives. Your amazing warm and friendly guide signifies so much a person like me and somewhat more to my office colleagues. Thank you; from each one of us.