In order to become financially successful, you must become knowledgeable about your spending habits. In order to do that, you need to be organized. There is no way around it: you have to track exactly how much money you have coming in and exactly how much you are spending.
Recommended Reading
Thomas J. Stanley Ph.D., The Millionaire Next Door, (2016 Edition).
You need to do this for a six month period to get a good idea of where your money is going. You will be shocked at what you discover about your life.
Calculate Expenses
Here is the easiest, cheapest, and most effective way of doing this task. First, get twelve envelopes, one for each month. Label each envelope with one month, January through December.
Second, begin asking for a receipt every single time you make a purchase. Even if the purchase is only for a pack of bubble gum, ask for a receipt. Parking? Get a receipt.
Eating out? Receipt. Doctor bill. Need a receipt. School tuition; get a statement showing what you paid and when you paid it. Every single purchase, no matter how small or large, gets a receipt showing payment.
Beginning with the current month, get a receipt for every purchase you make and put it in an envelope label for that month/year. At the end of that month, categorize all receipts and divide up the receipts into those categorized piles. Paperclip the piles and add up each category. Then get a total of all the categories for that month. Track every penny.
You do not have to go back to January and recreate the year in expense and income. That will be an overwhelming task and will discourage your first efforts.
Just begin with the current month and go forward.
Third, at the end of every month, sit down and get ready to go through the biggest eye opening experience of your life: the “where did all the money go?” journey. Within this step are six separate steps.
- Go through every receipt and make a pile for each category of expense. For example, put all the receipts for food together. Make a pile of receipts for clothes, a pile of receipts for utilities, for gas, parking, dry cleaning, gardening, etc. If you can’t figure out a category for an item, create a miscellaneous expense pile. You get the idea. Do not rely on your credit card statements for this particular task. That comes next. Just go by the receipts from the purchases so you catch cash purchases.
- Add up all the receipts in each category with a calculator. Get a total cost for each category. Everything – needs to be put into a category and added up into a total for each category. Transfer the information – the identification of the category – and the money total for each category – onto a separate piece of paper.
- Now go through all other documents that show expense. ATM receipts, checkbook register, bank account statements, credit card statements — every type of financial statement which shows what and how much you spend – gets put into a category and given a total expenditure for the month.
- Make sure you do not double up on expenses from both the receipts and the credit card or other statements. Use the credit card statements to verify and catch any additional expenses. If there are fees on the credit card statement, categorize that expense as fees. If you are running balances and paying interest on your credit cards, create a category called finance charges. Catch every expense.
- Be sure to track the biggest expense of all – taxes from your pay stub or business. Create a category called income taxes. Again, transfer all information regarding taxes you paid – the identification of the category and the total for each category – onto the same paper (or two or three) that has the totals from the receipts.
- Look carefully at each category and the totals in every category. Now add up all the totals for each category. That’s right, add up and total each category, and then add all the category totals, so you get one final number. That final total is what you are spending every month. This is where your money is really going. You will be surprised at what everything is costing you.
Now, go recover from your realization about what is really happening in your financial life. Then put all receipts back in the appropriate envelope for each month. Keep the receipts for tax preparation time. Have a designated place where you keep all your organized documents, including all credit card statements, etc.
Now you have created a complete calculation of your total expenses for the month. And be sure to read the Recommended Reading below. This is the best book out there for information on how the wealthy behave. One fundamental habit they have is tracking income and expenses; they know exactly where their money goes every month.
Read the next article because we are now going to focus on your income.
And don’t forget to the read the book, “The Millionaire Next Door” under Recommended Reading. This book gets into an amazing amount of detail as to how the wealthy become ever more wealthy through the simplicity of frugality. This books shows graphs of whose wealthy, the way they think, and how they avoid the traps of poverty. This book has been around my place for years. It never gets dated. Must be a classic.
Recommended Reading
Thomas J. Stanley Ph.D., The Millionaire Next Door, (2016 Edition).
Amazon Book Selections:
Personal Financial Statement Journal: Income / Expense Statement, Assets / Liabilities Statement
Ledger Book: Income and Expenses Tracker / Profit and Loss Ledger / Book Keeping Log for Small Business / Home Accounting Notebooks / Log Book for Personal Finance / Transaction Journal
Trip Expense Log Book: Weekly Business Travel Journal & Cost Tracker Notebook
2025 Five-Year Monthly Bill & Expense Tracker For Financial Mastery & Focus: Track. Save. Repeat.
Better Farm Accounting: A Practical Guide for Preparing Farm Income Tax Returns, Financial Statements, and Analysis Reports
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