Hollywood legend Errol Flynn once opined that “any man who has $10,000 left when he dies is a failure.” He also noted that his biggest problem “lies in reconciling my gross habits with my net income.”
Clearly, Flynn failed to keep a spending record.
More people than care to admit it live like Flynn. They have no idea where the money goes, a symptom of a paycheck-to-paycheck life that hides a deeper problem: too much spending.
For anyone looking to curtail spending, increase savings or reallocate their earnings, the best way to get a handle on where the money goes is to keep a spending or cash-flow record.
And one of the best times of year to track spending is the fall, when the vacations have ended and the school clothes have been purchased (even if both haven’t yet been paid for), and spending habits return to “normal.”
You can then use the information gleaned from your spending ledger to plot a holiday gift-buying strategy that won’t take months to pay off.
“Spending problems creep up on people,” says Eric Gelb, author of the books “Personal Budget Planner” and “Checkbook Management.” “It pays to review where your money goes.”
For anyone trying to live on a budget or simply make a reasonable savings plan, a spending record is a low-tech self-examination of cash flow. It is different from budgeting because a spending record merely tracks the money you spend without making any attempt to allocate it. (Budgeting, therefore, is a secondary part of the process.)
Unlike a budget, a spending record by itself does not require a significant change in how a consumer uses money. Instead, the big change most often is a notebook, and the time it takes to write down all expenditures.
Most experts say it takes about a month to get a good handle on where the money is going, although a reasonable cash-flow estimate can be constructed by following the money for a week.
With that in mind, here are the elements to consider in compiling a spending profile and how to use the information you uncover:
– Pick a tracking system that works for you.
The idea is to get an accurate picture of where your money is going, not to create a new burden. While you get the greatest accuracy from carrying the notebook and jotting down every expense–from the coffee and doughnuts during the morning commute to the take-out food on the way home–that can be a bit of a pain.
If you aren’t likely to track things that carefully, you can simply keep track of the cash that goes with you to work, and how much of it comes home.
An up-to-date checkbook and credit-card bills also can be used to create a spending record, showing where the money has gone over, say, the last 30 days.
And there are plenty of computer programs, Quicken and Microsoft Money among them, that can calculate your cash flow down to the penny, provided you keep track of the data and enter it into your computer.
– Live normally; keep the record honestly.
While the goal of a spending record might be to see where you can change your habits, the idea behind it is to gauge where you are now.
So don’t cut out the coffee and doughnuts–at least until you see that there is a better way.
Likewise, many people don’t like to acknowledge their human frailties, especially if they result in spending habits that must be exposed to their spouse.
It’s important to recognize, however, that the small things matter. If you have a $1-a-workday candy habit, for instance, that translates to more than $200 spent each year. Spending three times that much on a daily lottery game amounts to nearly $1,100 a year.
If your spending concerns you enough to do this exercise, include your habits–warts and all.
– Examine all facets of your cash flow, including fixed, periodic and discretionary spending.
As you try to use your cash flow to change your habits, you will need to break down your spending into three categories.
Fixed costs include rent or mortgage, loan and lease payments, utility bills, commuting expenses, alimony and so on. These are the basic, unavoidable bills that absolutely must be paid each month.
Periodic expenses run from estimated tax payments (made quarterly) to car-repair bills and insurance premiums. Try to figure out what these costs run in a year, and then break the results into 12 parts to see your average monthly outlay. Since these costs also must be met, be sure they are covered.
Many people run into problems by using periodic expense money for other things. Then, when the bill comes in, the money to absorb this spending hit is already gone.
Discretionary spending–money spent on things best described as non-necessities–is the easiest to cut.
That said, take a good look at how you can curtail fixed costs. “Ultimately, you’re not just reviewing your spending, but you’re seeing whether this is really where you want your money to go,” says Gelb. “It is harder to trim fixed costs, but it’s not impossible.”
– If you need to cut spending, set a target.
Most people enter this exercise with a goal, perhaps hoarding extra cash to pay for something big, or simply to find a way to get by while socking more money into the retirement plan.
Either way, give yourself a concrete target of how much you want to trim your monthly costs by. Then, using your spending record, see how you could have saved that money.
This will be the step when you decide to give up the doughnuts or the lottery tickets.
– Keep your record on file.
A cash-flow analysis is not a once-and-done deal. Eventually, spending may creep back up, or you may need to find other places to cut your costs if you decide to live on a strict budget.
By maintaining your record, you can look back at your own history and see where new expenses have arisen or old habits have returned.
“When you really see where the money is going, it gives you a chance to re-examine your priorities,” says Paul Richard, director of education at the National Center for Financial Education. “That’s when you find out what you can really live without.”
