Creating and sticking to a budget doesn't have to be painful. In fact, the process of determining where you spend your hard-earned dollars and then making adjustments can make you feel in control of your finances, as well as help you save money to reach your goals.
The first step in creating a workable budget is to figure out your expenses.
How to Track What You Spend
Here's how to determine precisely how much you’re spending:
- Generally, it's easiest to track your expenses using an app on your phone. You can find all kinds of different apps for this purpose. Some are free; some aren’t. Many expense-tracking apps can connect to your bank and credit accounts to pull and organize your transaction data. But if you’re concerned about sharing your account information—or if you mostly use cash—find an app that lets you input your information manually. Entering information by hand takes more effort, but it gives you a better idea of where your money’s going and better protects your financial data. Or, if you prefer, you can find a form online to record your expenses, print it out, carry it with you, and write down your expenditures.
- Keep track of your expenses for at least two months. By doing this, you'll avoid creating a budget based on a week or a month of unusually high or low costs. If you’re married or live with someone with whom you share costs, you should each record your expenditures.
- Begin recording your expenses on the first day of a month. Record every amount you pay by cash or cash equivalent—check, ATM, debit card, or automatic bank withdrawal. Don’t record amounts you charge on a credit card. Your goal is to initially get a picture of where your cash goes, and you won’t actually pay off a credit card purchase right away.
- When you make a payment on a credit card bill, that’s when you should list the items your payment covered as an expense. If you don’t pay the entire bill each month, list older items you charged that total a little less than the amount of your payment, and attribute the rest of your payment to interest. (Read about how to avoid credit card debt.)
- Be sure to include seasonal, annual, semi-annual, or quarterly charges you incur but didn’t pay during your two-month recording period. (Adjust the amount to a monthly basis and include it for each month you're covering.) The most common are property taxes, car registration and maintenance, online subscriptions, tax preparation fees, and insurance payments. If you’re recording expenses in the winter months, don’t forget summer expenses—like camp fees for your children or pool maintenance. Similarly, if you do this exercise in the summer, be sure to account for your annual holiday gift spending. Think broadly and be thorough.
Where’s Your Money Going?
At the end of two months, review your totals. Are you surprised at the dollar total or at the number of items you bought? Are you impulsively spending your money on many different items, or do you consistently tend to spend it on the same types of things? Then ask yourself if you could have eliminated certain expenses or reduced the cost of essentials: Did you compare prices when shopping? Did you try to find a coupon code or rebate to get a lower price? Could you choose a less expensive option, like working out at home rather than paying for a gym membership? (Learn the basics of money management.)
Ultimately, getting or skipping a cold brew coffee or avocado toast here and there won’t make a huge difference in your overall budget—but a series of decisions will. If you always eat out, buy only the most expensive clothing, or habitually purchase whatever you want whenever you want it, these costs add up. The trick is to figure out where your money is going and then find ways to lower certain expenses in a way that works for you. If you can’t reduce your costs significantly, consider ways to increase your income. (To learn more about the next steps in creating a budget after you’ve tallied the money you spend, see How to Make a Budget.)
To learn more about managing your finances wisely, visit some of our favorite personal finance websites and read Avoiding Financial Trouble: Ten Tips.
Also, consider getting Solve Your Money Troubles: Strategies to Get Out of Debt and Stay That Way, by Amy Loftsgordon and Cara O'Neill (Nolo), which is a comprehensive guide to getting back on your financial feet. It provides sample budget sheets, information on how to negotiate with creditors and deal with debt collectors, and more.