Now Is the Time to Get a Handle on Your Spending

BOSTON – Now that the kids are back to school, it's time for the grown-ups to get back to financial basics.

The end of summer brings with it the ideal time for consumers to get a handle on their spending. With summer vacations completed, tax refunds a distant memory and the year-end holidays not yet on the horizon, autumn is the season where spending habits tend to fall into what most people consider "normal."

Unfortunately, too many people live by Errol Flynn's definition of normal; the late actor once noted that his biggest problem was "in reconciling my gross habits with my net income." In fact, an A.C. Nielsen study of consumer markets across the globe found that Americans are more strapped for cash than just about anyone in the world, with 22 percent of U.S. respondents saying that once they cover basic living expenses, they're out of money.

Given that we live in a world where a credit card is the only tool necessary to live beyond one's means, it makes sense to periodically look at your spending habits and track where your money goes.

Many people confuse a spending record with a budget, when the two could not be more different. A budget is, effectively, a self-imposed spending plan or limit, while a spending record is an itemization of the cash is going — without altering that spending pattern until you get a chance to analyze it.

Even if you tracked your spending in the past, a review may show that your needs and habits have changed and that you can fine-tune your cash flow.

Keeping a record of where the money goes is not a promise to change habits or alter behaviors. It is not a commitment to brown-bag lunches or to give up the morning coffee fix; instead, it's an audit that might help you come to the conclusion that a smaller java in the morning would save you 35 cents a day — about $90 a year — and allow you to throw away an empty cup instead of one with six ounces of cold, wasted joe.

Get out the notebook

The process is simple: Write down all expenditures. Most experts say it takes about a month to get a good handle on where the money is going, although a reasonable estimate can be constructed by following the money for a week.

Pick a tracking system that works for you so that you get an accurate snapshot of your cash flow. Don't make your system burdensome and hard to live with. While the greatest accuracy comes from jotting down every last expense on a pad in your pocket, it may be sufficient to just track how much cash goes with you to work each morning and how much of that money comes home at the end of the day.

Little stuff adds up, so this is one case where you want to sweat the small stuff. A $1-per-day candy habit at work, for instance, equals more than $200 spent each year. Spend three times that much on a daily lottery game, and it's nearly $1,100. If your spending record shows that you take $10 to work every day and come home with nothing — and if you ultimately are looking for ways to turn spending record into new, thrift-conscious budget — you will ultimately need to know where that cash has gone.

An up-to-date checkbook and credit-card bills are other good tools, showing where the money has gone over, say, the last 30 days. And there are a variety of computer programs that can calculate your cash flow down to the penny, if you want to enter every last bit of data.

No matter how you decide to keep the record, live normally and keep the record honestly, warts and all. Don't skip lunch every day so that the record looks good; you'll only be fooling yourself and you'll pay the price if you live normally again once the recording period ends.

Three cost categories

Armed with a complete spending record, experts suggest you'll find that spending comes in three flavors: fixed, periodic and discretionary.

Fixed costs are the basic, unavoidable bills that must be paid each month (rent or mortgage, loan and lease payments, utility bills, commuting expenses, alimony and more).

Periodic expenses run from estimated tax payments to car-repair bills and insurance premiums. Try to figure out what these costs run in a year, and then break the results into 12 parts to see your average monthly outlay. Just because these bills may not show up while you are tracking cash-flow doesn't mean they aren't a big part of your spending.

Discretionary spending covers items that are best described as non-essential and it's where cuts are easiest to make.

Obviously, fixed and periodic costs are hard to cut, though programs such as budget-payment plans offered by utility companies can at least help keep them consistent so that they don't become a cash-flow problem. Look, too, at any alternative services, providers and rate plans, to see if you can cut fixed costs by changing telephone services, for example, or by raising the deductible on an insurance policy.

When it comes to discretionary spending, be sure you take full advantage of the money you spend. If you aren't going to the health club regularly or don't read magazines you've subscribed to, see how much money you can recover by cutting them off. Look for ways to keep costs in check — no one needs to spend money in order to be "entertained" at all times — so that you're not radically adjusting a lifestyle but fine-tuning it.

Finally, examine your spending record to see if it truly represents where you want your money to go. If not, start listing your priorities so that you can direct your resources towards them.

It becomes much easier to cut habitual spending when you realize what you are missing out on and how simple changes could help you achieve your goals and priorities.