Get Control Of Household Spending In Five Steps

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spending budget illustration

For most of us, the path to financial success begins with defining and sticking to a spending budget. After all, if you don’t know where you’re coming from (with spending) how do you know how you’re progressing going forward?

1. **Track your expenses**
Tracking your expenses is the critical first step. It can be very intimidating and cumbersome, but it doesn’t have to be. I recommend my financial planning clients start with [Mint.com](http://mint.com). Mint is a free service from Intuit, the company that owns Quicken. They provide the service for free in exchange for being able to serve you ads for things like credit cards, car loans, and stock brokerage offers, which is how they make money.

To use Mint, you provide them your usernames and passwords for your online access accounts at your banks, credit cards, investment accounts, and even your 401k. Mint pulls in all of your transactions and attempts to categorize them. This is where you will need to do some work. For the first couple months, you’ll want to set aside some time to log into your Mint account and look through those transactions to make sure they’re categorized properly.

There are many other services and ways to do this, but the important point is that _you do it_. What you’ll end up with is a detailed report including tables and graphs showing you what where your money is coming from and going to.

2. **Analyze your purchases**
The next step is to look at all of your data. I recommend starting with a simple pie chart that shows how much of your monthly income is being spent on which categories.

Ask yourself:
-What are my largest expenses?
-Am I using all of these services?
-Am I willing to trade this monthly expense for my long term goals?

3. **Determine what to change**
Hopefully you have already determined what your goals are. I will write more about how I set financial and personal goals in the future, but for now, let’s assume you’re undertaking this process because you already know what you want (e.g. retire sooner, get out of debt, pay for schooling, etc.)

Build a simple table and list out:
1. Income sources. List all your household income sources. I would use your actual paycheck amount, after taxes, etc.
2. Expenses that are must haves. Examples here would be: rent or mortgage payment, cell phone, food, a car to get to work.
3. Expenses that are ‘nice to haves.’ These would be things like eating out, entertainment, new shoes, and so on.
4. Total surplus or deficit. Subtract your expenses from you income and list the total. This (hopefully) positive number is what you have available to apply towards your goals.

Some of these decisions are difficult, especially with a the social dynamics that might be happening in your life. The idea here isn’t that you’ll never ever eat out again, but that you’ll be conscience of the decisions you’re making. Start slow, as with a diet, if you cut something out cold turkey, it’s very likely too difficult and you’ll revert back.

In financial planning, I like to talk about the science part and the art part. There’s some of both in play here, but I believe most of the questions are lifestyle choices. I could encourage to do one thing or another, but if its not something you want to do yourself, it’s probably not going to happen.

4. **Spend smarter**
calculator_imageAfter you’ve looked for things to cut back on, I next recommend looking for ways to spend smarter. Are you getting the best price on your utilities? Your groceries? Your auto insurance?

I recognize that for many people, including myself, running to half a dozen stores looking for the best price is feasible, nor how I want to spend my time. However, one thing we did in my own house was to search for a credit card that had no annual fee and a good rewards program. We now use this one card for the as many of our purchases as we can to maximize the cash back rewards. Life is simpler without several store cards to keep track of and we get a nice monthly statement showing where we spent our money.

5. **Set deadlines**
If, for example, your goal is to pay off a loan or a credit card, set a reasonable time frame to accomplish it. Focus on one item at a time. For example, by July 1st, I will have set aside $500 for my daughter’s college fund. Having deadlines creates a finish line, which helps us strive for our goals. After you’ve accomplished the first goal, you’ll want to get the rest done!

We utilize these steps in our family. What works for yours? Leave a comment or tweet/message me and let me know what has helped you identify and stick to a monthly budget.

-Paul