Track your spending
The first step in being able to analyze and improve your cash flow situation is to understand how you are currently spending your money.
Generally, most of us know where 70% to 80% of our money goes, and this basically includes our major expenses, such as debt, rent, utilities, food, etc. The real question involves the remaining 20% to 30%, and this is the part that is most critical to controlling your expenses and funding your financial goals. Yes, debt can be slowly reduced and there are ways to save on the grocery bill and utilities, but typically it's the unaccounted discretionary spending that holds the key to improving your financial situation, if only you knew where the money went. The only way to know precisely how the money is being spent, and then develop a plan to control some of it, is to actually keep track of your expenses for a certain period of time, and then categorize and analyze the spending to determine what changes you can make.
Think you don't need to track your expenses? Think you already know where all of your money goes? If you're convinced you know how and where you spend all of your money, at least try this 5-minute exercise. If you know you need a plan, then the first step is to carefully record all of your daily expenditures for a certain amount of time.
For those who haven't done this before, you need to start by recording your expenditures for a month. If you have already developed your initial spending plan, then you will be repeating this process for at least three months to ensure you address quarterly payments (association dues, insurance payments, etc.) as well as to allow for a month with unusually high expenses.
How to record your expenses depends on your situation:
- If you are Internet savvy, you may have explored and wish to use one of the Web applications for downloading, aggregating and even categorizing your bank and credit card purchases. Use this approach.
- If you are computer savvy, you may be using (or wish to purchase) one of the software programs that can be installed on your computer, and will allow you to interface with and download information from your bank and credit card companies. Two well-known products include Intuit Quicken or Microsoft Money. Use this approach.
- While computer technology is great, and can potentially save you time in the long run, you don't have to buy software or use Web services you aren't familiar or comfortable with. The easiest way to get started now is to grab some paper and a pencil, and we even have some worksheets you can print and use to help you. Use this approach.