Money: stopping the disappearing act

If you are anything like most the people I know, money seems to just flow through your fingers. Once the bills are paid the rest of it is referred to as disposable income. And boy do I dispose of it. Unfortunately, at the end of the month I sit back and wonder where it went.

Keeping track of your money and exactly where it goes is one of the hardest things to do. Credit cards, ATMs, checks, cash, debit cards — these are all ways you can spend your money. So how do you keep track of where it’s all going? There are a few tricks that will help you end up with more in your bank account and less in someone else’s. I’m going to call it a spending plan; most people know it as creating a budget. Learning these tips will go along way to stopping the disappearing act:

• Communicate about money
• Track your spending
• Create a good plan (budget)
• Stick to the plan

Unless you walk around with a notepad and a calculator, it’s really hard to know where every penny goes. But there are several good ways to account for what you do with your money.

TALK ABOUT IT

Keeping track of your own spending and finances is hard enough. But when you have a family it becomes even harder. You might have two or more sources of income, and multiple credit, checking, and savings accounts. And everyone has expenses.

If you are in a relationship where your income and expenses are combined then talking about money is vital. How you communicate about money is almost as important as how you spend it. Here are some Tips for talking about it:

• Set ground rules for money discussions
• Don’t judge who is right or wrong
• Identify common problems, then possible common solutions
• Agree on common solutions, pledge to live by your agreements
• Establish common goals
• Listen, listen, and listen again!

There is no single, right way to manage the household’s finances. What matters is that the two of you agree on how to handle the money. The bottom line is that one of you has to take control of the finances. Which one doesn’t really matter, just make sure they know how to add.

THE DISAPPEARING ACT; Track It to Stop It

Do you ever feel like money just disappears out of your pocket? Usually it’s just a matter of not keeping good track of your spending. If you track your spending habits, you can find, and maybe save, some of that “lost” money. So let’s take a look at how to keep track of your spending.

To really see where your money is going, you’ll need to monitor your spending for a full month. No tricks here. You just want to write down everything you spend. Whether you use cash, checks, or credit cards, be sure to record all of your spending. An easy way to do this is to save every single receipt from all of your purchases. No matter if you use cash, credit, or debit, save the receipt. This makes it easier to add it up and the end of the month.

Using the following Expense Chart, or one like it, will help track down spending on a weekly or monthly basis. Organize your receipts by category (recurring and non-recurring)and then transfer everything to the Monthly Tracking chart at the end of the week. I have included a link a potential list of spending categories.

Spending Categories

Recurring are your fixed monthly expenses like mortgage or rent, utilities, credit card and car payments. Things that you have each and every month. Tracking your expenses for an entire month, will give you a better picture of where all your money is really going.

Remember, the non-recurring expenses are things that change may or may not be a monthly expense. These you can often times cut back on or do without. An example of these might be that Starbucks coffee each morning, eating out, movies, or those new pair of shoes. OK, for you ladies, this just might count as a necessity. If you are in doubt, go back to your NEEDS vs WANTS chart. Here is the link for an example expense tracker.

Monthly Expense Tracker

Once you’ve tracked your spending for a month, organize the spending into categories. By sorting the expenses into categories, you’ll be better able to see where you can cut expenses. Remember that every little bit adds up.

Now review your chart. Surprised? How much do you spend eating out? Are your top priorities really getting the money they need?

THE POWER IN PLANNING

Creating a budget shows you exactly how you spend your money. Once you know that, you can see where to make changes to help manage your finances.

There are four steps to creating an effective spending plan:

• List your sources of income
• Find your disposable income (money after taxes)
• List your monthly expenses
• Calculate the difference between your disposable income and your expenses
• This is what is left for your goals and savings

OK, now you are looking at the bottom number. If it is positive, you are already on your way. If it is negative then more work needs to be done.  You’ll need to decrease your expenses, or increase your income. Otherwise, you will find yourself owing money that you don’t have.

Now let’s look at each step individually.

First, you list your sources of income. There could be many that don’t come to mind right away, so take your time and think carefully about all your sources of income. We’ve listed several common sources to help get you started.

• Paychecks
• Tax refunds
• Dividends or interest
• Bonuses, commissions or tips
• Alimony or child support
• Pension or other retirement income
• Social Security Disability
• Welfare or other government entitlement programs

Next, you’ll need to figure out your monthly disposable income. That’s the money you have available for saving, spending and investing, after you subtract taxes from your gross monthly income. For most of us it is your “take home pay.”

The next step is listing your monthly expenses. There are two types of expenses: fixed and variable. Fixed expenses usually don’t change from month to month, but variable expenses, such as utility bills, do. Variable expenses may also include amounts for infrequent events, such as holiday or birthday gifts.

If you put any money into savings each month, be sure to include that amount as an expense, too. Think of savings as a bill that you pay to yourself.

The final step is calculating the difference between your income and your expenses. First add up your net monthly income from step 2. Then figure your total monthly expenses from step 3. If your total income is more than your total expenses, you have a positive balance. If your total expenses are more than your total income, you have a negative balance. A good spending plan should do the following:

• Reveals your financial health by comparing your income to expenses
• Avoids overspending and shows you where you can save
• Breaks down your expenses into helpful categories
• Establishes financial control and direction by revealing potential problems
• Helps save for emergencies, and
• Helps you achieve your financial GOALS!

Why do it? Ulimately, a budget will give you the freedom to live how you want. In the next post we’ll talk all about credit and why you should care.