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The price of living well on a budget is eternal vigilance: you must be aware of where your dollars are being spent. You have to plan your expenditures and have the discipline to purchase according to your plan.
The best way to track expenses is to log them on a daily basis. Use the Expense Log spreadsheet, adding each expenditure as it happens. Try to log expenses on a daily basis for at least a month or two.
Expense Log Spreadsheet (.xls file)
Keep track of all your bills and write down everything you spend. Create logical categories for expenses and total the spending for each category.
Identify each expenditure with one of the following expense types:
* Regular Expenses - Regular, monthly, predictable expenses that are for items that you cannot do without, such as house payments and utility payments. I suggest that you include a monthly payment to your investment fund as a regular payment.
* Debt Service - Payments toward loans which are for items purchased prior to the current month. Home mortgage, auto loan and credit card debt falls into this category, however if you pay off your credit card the same month that the purchases are made, the expenses would fall under the appropriate category for the purchase.
* Annual Expenses - Regular, predictable expenses that occur every year or several times a year. These are items which are paid once or twice a year, and which you cannot do without, such as property taxes, condominium fees and insurance.
* Variable Expenses - Expenses which are somewhat unpredictable, and discretionery expenses, such as food, entertainment and clothing.
* Emergency Expenses - Unforeseen expenses which cannot be avoided, such as auto repairs or health care costs.
* Strategic Expenses - Planned purchases, which are larger than the usual discretionery expense, such as home improvements and purchase of a vehicle.
Use a spreadsheet to organize expense categories and types, using subtotals and percentages to give you an idea of where your money goes each month. Learn to use pivot tables to get subtotals of expenditures by expense category and type.
When you buy items on a credit card, enter the expense on the same day that you buy it, not when you pay the credit card bill.
Once you start logging your expenses on a daily basis, you need to separate long term credit card debt from purchases which have been logged in on a daily basis. When you purchase an item with a credit card, log it in under the appropriate expense type (Variable Expense, Regular Expense, etc.). If you are paying long term credit card debt, show the payment on the debt as a monthly Debt Service expense. If you show the expense at the time of purchase, and then again when you pay the credit card, you would be showing double the expense! For budgeting purposes, it is much easier to use a debit card, NOT a credit card. Until you can pay off your credit card balance each month, I recommend that you do not use credit cards for purchases if at all possible.
When you withdraw money from your bank account for your wallet or purse, do not enter that as an expense. Think of your wallet or purse as a savings account that you carry with you. It is not an expense until you give the money to someone else.
You may want to add a column for the name of the person who spent the money. Some expenditures are decisions made by both partners, some are made by one partner. For example, you could use a column to log expenditure decisions by Bill, Mary or Both.
Another column that might be useful is to log in credit card purchases. That way at the end of the month you can check your credit card bill to see if it matches your actual expenditures. If you have multiple credit cards, type in the name of the credit card company in this column.
Use "Pivot Tables" to show expenses by category. Pivot tables are a spreadsheet utility that can show total expenses for each type listed in your expense type column. Use your spreadsheet help command to learn how to set up pivot tables. I use pivot tables to show expense totals for Expense Types and Budget Categories at the end of each month.
Go through your expenses each month and try to find spending mistakes, expenses that were not wise decisions, purchases that you really didn't need or that you should not have spent your money on. Identify this amount and try to learn from the mistakes to limit future mistakes.
Go through your expenses again and think through how you spend your money. Are there better ways of getting things done? Are there cheaper alternatives that will get you the same satisfaction? Can you reduce charges by changing contracts, plans or policies? If you change the way you do things, can you reduce your expenses? If so, make your decisions and take appropriate action. Identify the savings amount as available for savings and investment.
Keeping an Expense Log is a lot of work. You may not want to do it on a permanent basis. Try to do a complete job of logging expenditures daily for at least one or two months. This will give you a good idea of where your money is going and how you can find ways to save money.