Track Your Spending to Save More

By April Dykman - SavingsAccounts.com

Have you ever been surprised by a low checking account balance or a high credit card statement, then thought to yourself, "Where does my money go?" If so, it's time to rein in your finances and identify your spending patterns.

The Importance of Smart Savings Goals

When people are shocked at how much they've spent, they usually tell themselves they will "try to spend less from now on." The problem is that's a vague goal, and you need a so-called "S.M.A.R.T." goal: Specific, Measurable, Attainable, Relevant, and Time-bound.

What might a S.M.A.R.T. goal look like? A better goal would be, "I'm going to cut back on dining out by 50% to save $150 by the end of next month."

But the only way to set a goal like that is to know how much you're spending at restaurants right now.

When you track your money, you can see where you overspend and where you can save. You might feel like you don't have any extra money to pay down your credit card or to put into a high interest savings account at the end of the month, but tracking your expenses might reveal that you bought $400 worth of clothes or spent $300 on a new electronic gadget that you don't really need.

When you see money in and money out, you get a clear picture of your finances and how to get better atsaving money. There are a lot of different ways to track your money, and what works for one person might not work for another.

The following are descriptions of some of the most popular methods.

Envelope System

The envelope system is a sure way to stay within your budget. After you identify major spending categories, you'll label an envelope with the name of each category, such as clothing, entertainment, groceries, or dining out. Decide how much cash you will allot for each category that month, and stuff that amount of money in the appropriate envelope.

When you're at the supermarket, you'll withdraw money from the groceries envelope to pay at the cashier, and when you get the receipt, put it back in the envelope. At the end of the month, you'll have an intimate understanding of where your money is going, how much you have, and when you've hit your spending limit (hint: the envelope will be empty!).

What are the drawbacks? Some purchases do require a credit card. If you buy a book online, for example, you'd have to figure out how to reconcile that credit card charge with your cash system. One method would be to deposit the cash from the appropriate envelope into your savings account that covers your credit card payments. And you also have to manually track and reconcile any bank fees or interest charges that you can't pay with cash.

Is it for you? The envelope system might be for you if you have a lot of debt and want the discipline of cash, or if you prefer not to use or own credit cards.

Pencil and Paper

Pencil and paper was the accounting method long before computers were around, and many prefer the simplicity of a basic notebook or ledger. It's cheap, and you can take smaller notepads with you in a purse, bag, or pocket.

Similar to the envelope system, you'll need to create spending categories and assign an expense goal for each. As you spend money from a category, you'll subtract that amount from what you've allotted. For example, the entry for the book you bought online might be "-$15, mystery book, entertainment." Don't forget to include irregular expenses, such as gifts, vacations, home repairs, and auto insurance paid semiannually.

What are the drawbacks? If you have a spouse or partner with whom you share expenses, you'll have to get him or her on board, or else have him or her save all receipts so you can enter them when you get home.

Is it for you? If you prefer to use debit cards, credit cards, and/or checks, but still want a simple system that doesn't involve computer software and account log-in information, this would be a good method to try.

Electronic or Online

If you prefer a paperless system, you can either use a program on your desktop or online budgeting software. Options can be as simple as a spreadsheet and as robust as Quicken, which provides charts, graphs, reports, and more.

Online money management sites like Mint.com aggregate your accounts into one snapshot view and offer various tools and alerts to warn you when you've hit your spending limit or when your credit card bill is due. You'll have to provide all log-in information for each of your accounts.

What are the drawbacks? Desktop software can require more work to set up, and online programs make some people nervous about security. Take the time to review the security precautions a money management site takes to protect your account information.

Is it for you? If you want to run more analysis on your spending habits, like finding out how your spending this month compares with the last six months, money management software will make it easy to run the numbers. Another benefit to the online sites is that they can automatically pull your expenses, so you won't have to download account data or track it manually with each purchase or transaction.

Building Your Savings Account

As you track your spending, your goal should be to increase the amount left over at the end of each month so you can pay off debt, save for retirement, or put it in a savings account (after researching the best bank rates, of course!). Instead of setting vague goals you forget about by mid-month, you'll start to direct your money with S.M.A.R.T. goals and make progress with your finances.