How to Track Your Spending and Keep a Budget

In this article I'm going to outline some simple steps that you can take to gain control of your finances. Specifically we're going to be examining how to track your money better and how to keep a budget. Once you've got these two skills under your belt managing the rest of your money becomes infinitely easier.

Step 1 - Gather financial income from the last full month.
This may be a slightly time consuming endeavor, but it's a necessary one if you want to track where your money is going. You are actually going to have to rummage through your desk, files and cluttered up kitchen table in order to find all your bills and receipts. If you access these online then it's going to be a lot easier.

Step 2 - Identify income sources.
In order to spend money you need to make money. If you are making money then obviously someone is paying you, right? In this step you are going to figure out who's paying you and how much. If your salary is variable for some reason (perhaps you work on commission or are a freelancer) you may need to examine your earnings over several months. Don't include gifts or tax refunds in this category. Money obtained in this way is too unpredictable to take into consideration when developing a budget and should be categorized as windfall income.

Step 3 - Identify expenses.
You can't escape it; the whole egalitarian commune thing just doesn't work. Therefore it costs money to live. But just how much money? Don't just take a guess. You need to know exactly how much money you are spending and where you are spending it. To do this, you will group your outgoing money into categories (examples are listed below). If for some reason you have wildly variable expenses you may want to examine several months worth of bills to get a more accurate view.

What follows are the categories that I use with some comments. You should add or subtract any spending categories you desire. Another point to keep in mind is that 'credit card' is not a useful category. You need to know what you are buying with the credit card in order to effectively track your finances. 'Credit card interest payments' is a useful category and should be included.

Utilities
Rent - Unless you are living for free if your parent's basement, you probably have to pay rent to someone. This is a fixed expense, but it does have the nasty habit of creeping up every year.
Power - Face it, ever since the days of Edison and Westinghouse electricity has been a necessity. Since trying to power my apartment solely through a vast array of hamsters running on wheels isn't feasible, I'm stuck paying the power company. This bill is variable; it's lower in winter when all I'm running are lights and my computer. In summer it skyrockets as my archaic air conditioner desperately works to bring the apartment to a livable temperature.
Cable/Internet - I don't have cable TV but I do have cable Internet. I love my Internet. Since I don't do pay-per-view this bill is fixed.
Phone - Smoke signals are so passé so I own a cell phone. I don't go over my allotted minutes so this bill is essentially fixed.

Other Expenses
Groceries - Money spent on groceries, cleaning supplies, small appliances (ex. toasters) and basically anything else needed to make my life and apartment functional.
Entertainment - Stuff that keeps me happy and prevents me from falling into a vast morass of depression. Stuff like books and DVDs.
Booze - I often cook with wine and enjoy a glass of it with a meal. I'll also admit to having a passion for Bailey's, Kahlua and a good Riesling.
Dining - All food bought at a restaurant of any kind. If I buy a morning coffee at Starbucks, get a lunch at Subway or go out to eat for dinner it goes here.
Clothes - I don't buy clothes that often but I think it's a good category to have.
Pets - I have fish and cats, they cost money. 'nuff said.
Gas - The car needs fuel to run and fuel costs money.
Auto Maintenance - Things like oil changes go here.
Laundry Money - Doing the laundry costs money. Periodically I have go and get a crap load of quarters so that I can keep my clothes smelling clean and fresh.
Misc - The category for stuff I'm not sure where to put. Stuff like haircuts.

Step 4 - Do simple math.
Now it's time to look over all your bills and make your 3rd grade teacher proud by harnessing the power of simple math. First, add up all your income sources. Next, add up all your expenses. Finally, subtract your income from your expenses. If this number is negative, you've spent more money than you earned. That's bad, very bad. The objective is to spend LESS money than you earn.

Step 5 - Examine your income and expenses.
Regardless of whether you wound up with a negative or a positive number there is a high likelihood that you can save money and cut your spending easily. Did the size of any of those numbers startle you? Did you really need to buy everything you did last month? Did you even use it? Could you do without some of it in order to save for other things you want or need?

Step 6 - Prepare a budget.
Now that you have an idea about how money is coming into and going out of your hands its time to prepare a budget. It's a simple process. First, establish how much money you expect to get each month (step 2). Next, take all the expense categories you identified in step 3 and estimate how much money you expect to spend in each one. Make sure that your total estimated expenditure is lower than your total estimated income. That's it, now you have your first budget to begin working from.

Sometimes, in order to get your financial house in order and stay within budget you will have to consider making behavioral changes (ex: making your coffee at home rather than buying it from Starbucks). While this may seem difficult at first you'll get used to it. When you are trying to make behavioral changes its important to remind yourself why are you are doing it. For instance saving money to get out of debt or in order to buy something cool. Living a more frugal lifestyle can be hard but is worth it in the end.

Step 7 - Monitoring your budget.
Monitor your budget regularly. It's best to review it every time you add an expense. This allows you to keep up with your spending so you can put the breaks on if things are getting out of control. For example if you blow all the money you budgeted for entertainment in the first week, you'll need to make an effort from engaging in any additional entertainment related buying for the rest of the month.

Step 8 - Refine your budget.
Budgets are not static. They evolve with you. As your income or expenses change so must your budget change to accommodate them. If you anticipate a major purchase coming up, try to budget it for it by putting away a bit of money each month for that goal. Finally, remember that a budget is just a set of guidelines to help you keep control of how you spend your money. While emergencies can't be predicted, they can to some extent be planned for. You can do this by saving a bit of money each month in an emergency fund, which will be an invaluable financial cushion should you ever need it.