31 May 2007

Step 3 - Knowing what you spend

So this is where you actually start doing something. This is an extremely important step on your road to budgeting, don't skip it.

Most people know how much money they earn each week but few know how much they spend. You must have a realistic understanding of where you money goes to be able to budget and stick to it. If you want to know how to stop your money disappearing, you need to know exactly where the problem starts. You can’t stop leaks unless you know where the leak is coming from.

Get yourself a small notebook and write down everything you spend. That means everything you spend, every day. This might include mortgage payments, groceries, newspapers, chewing gum, lunches, Lotto tickets, your kids’ pocket money, coffee, petrol, your pocket money, travel, birthday gifts, an apple, bottles of water and Coke. Every time you spend something you must record it, no matter how trivial it might be. Take the book with you every time you go out, even if you’re not going shopping. You might stop for petrol, a newspaper or buy a bargain bag of tomatoes at a road side stall. Write down your purchase right after you spend.

Often when we spend on small items we don’t notice how much it adds up to over a longer period of time. For instance, if you’re buying a cup of coffee on the way to work that costs about three dollars for each cup, you’re spending fifteen dollars a week and around seven hundred dollars a year. If you’re in the same job for five years and you buy that cup of coffee every morning, you’ll spend $3,500 on coffee over that five year period. That’s for just a cup of coffee. The same logic applies to buying the newspaper everyday. Our local state newspaper costs one dollar during the week now. If you buy that on your way to work each day, you’ll spend about $1,125 over five years just to have something to read on the train or in your lunch break. A bit of organisation would allow you to have your coffee and reading material for a fraction of that price. You will only know that, however, if you track what you spend and see for yourself.

Attach a paper clip to the cover of your notebook and when you go grocery shopping, attach your dockets to the book with the clip. Dockets are aids to help you map your current spending habits. When you go home, record everything you spent on your shopping trip. Above all else, be honest with yourself. Make sure you record every cent. You are the only person who will see your spending record so if you cheat, you cheat yourself. Write everything down and at the end of the week, make your total. You’ll be surprised how those small amounts add up when you calculate it all. This record of your spending will be a valuable resource when you’re doing up your budget.

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