Do You Know Where Your Money is Going?

Managing your finances can be a difficult and frustrating experience but something everyone needs to do regardless of what stage of life they are in. Much like taking a road trip across the country, you start with a destination in mind, “where do I want to be”, “what do I want to do”? Having a detailed description of where you want to go, how you will get there, and the time it will take, are the keys to a successful trip and the same applies in the budgeting process. Starting with a few simple steps it is easy to be on track to a successful budget.


The most important aspect of developing a household budget is to determine where your money is going each week or month. First, everyone in the household should be involved in the budget process. Figure out where you want your savings to be in 12 months and develop a budget to achieve those savings. To start, determine the amount of total take home pay per month and then average that amount for the last three months. If your pay changes from month to month, average at least six months together to determine a normal monthly income.


Second, track your monthly spending for a minimum of three months. Your bank may offer the ability to break down your purchases by category to help you determine how much is spent each month and where it was spent, the same may apply to your credit cards. You should then break your spending into several categories. A very simple example uses three categories “Household” for mortgage, electricity and water payments; “Transportation” for auto loans, gas, oil changes and tire replacement; and “Food” should include your groceries, going out for a cup of coffee, or eating out. If you have credit card debt, you should be sure to include these monthly payments in your budget. Involving the family will help you remember small expenses that can add up over a month and a year, such as school fees, supplies, classes and extracurricular activities. After this exercise you should know exactly how much money is leaving your bank account or going on your credit card each month and where it is going. This is a basic budget to determine how your financial picture appears.


The next step is prioritizing all expenses into necessary and non-necessary and determining what items or services you enjoy but can do without or cut back on. Obviously groceries are a necessity but going out to lunch every day is something you can give up or cut back on. Determining a fixed amount to spend on each category, such as a weekly grocery budget or a fixed dollar amount for eating out will allow you to still enjoy some non-necessities without going outside of your budget. Once you have the spending budget in place, the best way to know exactly what is spent each month is to use only cash, which means no credit or debit cards, for all purchases. If you don’t have the cash to buy something you don’t buy it. An easy way to track your spending is by writing each expense category on a different envelope. After determining how much you need to spend each month (or weekly) within each category, on a sheet of paper write the amount at the top and place the cash inside the envelope. For example, when you take money out of the “Transportation” envelope to buy gas, write the amount and purpose on the paper and keep track where each dollar goes. Envelopes may be as general as “Transportation” but can be as specific as an envelope for “Gas”, “Car Repairs”, “Tolls, Tags & Registrations” just as an example. After several months you may be shocked at how much is saved by tracking your spending and only using the cash you have. Don’t forget to include an envelope for “Extras” with a little excess cash such as money for birthday presents and other things that come up periodically outside of your plan. You can make a game out of it and if you save a few of the “Extra” dollars put that towards a family trip or if debt is an issue make extra payments towards paying down your debt faster.


Discuss where monies from bonuses or pay increases will be applied or reexamine your budget when increases happen and adjust areas as needed or apply it to your outstanding debt. Or if your budget needs are met, with the money remaining, bonuses or increases here are some things everyone should consider doing:


  1. Pay off all debt starting with the highest interest rates or the lowest balance. Paying of higher interest rates will save you money in the long run, but paying off a lower balance may allow you to put more money towards higher rate debt and have fewer debts. It is your decision.
  2. Save for an emergency (not a trip or a down payment but a true emergency). This should be at least three months expenses but if you are self employed you may want up to six months of expenses.
  3. Save for your retirement. Contribute to a 401k plan if you are eligible, to an IRA or other retirement savings plan.
  4. Buy life insurance, usually term insurance coverage, until your planned retirement date.
  5. After numbers 1-4 are in process or fully funded you should start to save for a child’s education. Education expenses can be borrowed but you cannot do the same for your retirement funding.


There are always unplanned detours on a trip and the same goes with a budget. It takes some time and effort from everyone involved but once a budget process is in place it is a great feeling when you meet your goals and it will let you know when you have gotten off course or need to reevaluate you spending. Remember, it is a process, so reviewing your income and expenses periodically, but at least every year, will help keep you on the right financial road.


For help with writing a budget here is a link to some free templates: