The foundation of good money management is budgeting. And the foundation of budgeting is good bookkeeping, which begins with tracking your expenses so that you’ll know where your money is going. You will need to track every expense for at least a month. You could do this the old-fashioned way with a pencil and a notepad or if you have a smart phone with one of apps now available such as Cash back Expense Tracker or Expensify for Android phones or Expense Tracker Pro for iPhones.
Use a spreadsheet
Your next step should be to set up a budget on a spreadsheet. The top row should be months and each leftmost row expense categories. You should divide your expenses into fixed and variable. Your fixed expenses would typically be your rent or mortgage payment, your auto loan, insurance and property taxes (if applicable). Your first “month” needs to be the expenses you’ve just tracked – as a starting point. Your next month would then be the current month. Don’t forget to have at “Totals” row at the bottom of each column.
What are variable expenses
In comparison, variable expenses are those where you could make cuts. Examples of these include food, entertainment, hobbies, dining out, subscription and dues, household expenses, and don’t forget savings.
Where you could make cuts
Now that you’re organized and can see where your money has been going by category, your goal should be to determine where you could make cuts to free up the maximum amount of money for savings, to pay off debt, to take that dream vacation or some combination thereof. The areas where most people find it easiest to make cuts are in food, entertainment, fitness, eating out, subscription and dues. Unfortunately, these are the sort of “fun” categories, which means if you really want to reduce your spending you will be making some sacrifices.
Some specific examples
For example in the category of entertainment, do you have cable or satellite TV? Is it a standard or premium package? If it’s a high-end package, you should be able to scale that down to a more basic one. When it comes to dining out, you don’t have to give it up entirely. Instead, simply choose to eat at less expensive restaurants. What about your cell phone? Do you have one of those all-inclusive packages that let you talk, text and browse the Internet? If so, you might be able to scale back to one that just lets you make and take calls. If you’re worried about your fitness, you wouldn’t necessarily have to give up that health club membership. You might be able to find a cheaper club or use a community rec center for your exercise. We have two great ones near us and they cost just $1 a visit.
The lowest hanging fruit
If you’re typical, food is the category where you should be able to make the biggest and easiest cuts. In fact, you could probably cut your food costs by at least 25% just by using coupons and taking advantage of store specials. Our supermarket recently sent us a “personalized” coupon that saves us money on 10 of the items we buy most regularly. Maybe your store does the same. If not, look for specials in your local newspaper, especially what are called BOGOs or buy one, get one. When you find a sale on common, everyday items such as paper towels, toilet paper, detergent and the like, be sure to stock up for at least a month.
Keep tracking those expenses
You will need to keep tracking your expenses and then entering them into your spreadsheet so you can see how you are doing versus each of your budget categories. You may have to make some revisions after the first few months but that’s acceptable so long as you don’t exceed that budgeted “Total” at the bottom of each month.