Understanding your spending habits is one of the most important things to consider as you try to overcome your personal recession and build wealth. Before you can change your behaviors and start saving more money, you need to understand what you are doing, and figure out where your problem areas are. This means tracking your spending and getting to know your spending habits.
Studies report that the average household wastes between 10% and 15% of its income each month. This wasted money doesn't show up in large amounts. Rather, it is in the little things that you buy - purchases that you don't really think about because they seem so small. However, it's those small expenditures that can add up and come back to haunt you. If you want to streamline your finances and build wealth, you have to start by recognizing that some of your purchases are standing in the way of long-term financial freedom.
Track your spending for two or three months. You can use a paper ledger, but it is easier to use some sort of computer software. You can buy software (I like Quicken), or you can use free budget tools online from places like moneyStrands.com and Mint.com. Assign categories to different purchases, and when you spend money, enter it into your records. I like to use categories like Entertainment, Personal Care, Clothes, Dining Out, Household, Groceries, Utilities, Medical, Auto, Insurance and Recreation. (There are subcategories as well.) When you spend money, figure out what goes in which category. For example, my $75 receipt from the store might be divided into $50 for groceries, $10 for Personal Care and $15 for Household. Note: That $3 latte you get, the $1.50 bagel you buy, or the $0.75 candy bar you get from the vending machine should go in Dining Out, not groceries.
Be brutally honest with yourself as you do this, or it won't work. After keeping track for a couple of months, look at what you're spending in each category. Many categories, like Recreation, Entertainment and Dining Out can be cut back on. Or you might decide that you are spending more than necessary on Clothing. In the end, you need to consider your actual needs and find areas where you can cut back by choosing less expensive activities, or by preparing your own food at home. Or just buying less. Once you know your spending habits, though, you can work to make real changes that can benefit for personal finances.
-- Miranda
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