Keep Track of Spending

Help tracking spending and earnings

By Gary Foreman

 Without a benchmark, how do you know if you're spending too much? And if such a benchmark exists, could it do all the calculations you need to keep track of spending in relation to earnings?

When you're trying to payback what we will call “self-inflicted debt,” it would be great to have  software to keep track of it all.

Software Solutions
Microsoft Money generates charts that show how much you are spending in various areas. Most budget programs have a similar feature and so you can compare those charts to a “typical” budget.

It’s a good idea to work with after-tax figures. We can all relate to what we take home in our paycheck and how much we can spend in any area is determined by multiplying our pay by the percentage for that category.

A Guideline for Spending
A useful guideline allocates “take home pay” as follows:

Housing                34%
Food                     16%
Auto                     15%
Insurance              5%
Debt Repayment    5%
Entertainment        7%
Clothing                4%
Savings                 5%
Medical                  5%
Everything Else      4%

Look at your existing expenses and see how they compares to the guideline. Most budget software and professional advisors are reluctant to provide a one-size-fits-all budget plan because every family is different. These guidelines should be modified for family size, age and number of children, as well as some other factors. Keep in mind these figures are a starting point for discussion. Nothing more.

For example, suppose debt repayment requires more than 5% of your after-tax pay, which is not  uncommon for more than a few of the categories. Lets face it, most people's lives don't fit neatly into the average.

Make Adjustments
One oversized category could be okay. Perhaps housing consumes 38% of your income, which could be the case if you live an expensive urban area. The only way to reduce it would be to live  to move! So, you know that the best place to reduce spending would be to continue to repay debt. (This is where a computer cannot replace human effort.)

By carving 5% or more out of other categories can be difficult. The problem is that about two thirds of the average budget it consumed on housing, food and auto and so the best place to find some extra money is in those areas. If you can't make up the 5% there, it's difficult to find that much in the smaller remaining categories.

When one category is far out of the average, the best way to solve the problem is to reduce spending in that specific category. That could require drastic action, such as trading a car you can't afford for one that's within your budget. Or not cruising the mall shopping for clothes each weekend. Or moving to an affordable home.

If debt is the problem, consider debt consolidation, credit counseling or even bankruptcy if the debt is simply too much to repay. Of course, if you can begin to repay the debt, each month will get easier since the amount owed will be a little lower.

Whatever your circumstances, use any reliable budgeting software, compare your spending to some guidelines, make adjustments that fit your lifestyle and then determine what corrective action needs to be taken. It'll take a little work, but will give you a better answer than any one-size-fits-all budget template.

Gary Foreman is a former financial planner who currently edits The Dollar website and newsletters.