5

Where Does All the Money Go?

Tracking Is the Way to Find Out

Happiness is a place between too little and too much.

Finnish Proverb

Most people have no idea where their money goes or how they spend it. This is partly due to human nature. So don’t feel like the Lone Ranger if this describes you.

We trick ourselves by expressing our income in grandiose gross annual terms while talking about our expenses as daily incidentals. For example, let’s look at Sharon, who spends $4 a day on lattes1 and has an annual salary of $50,000. Why not spend $4 a day on lattes, she reasons. Anyone who makes $50,000 a year can certainly afford a lousy $4 latte every morning as a reward for her hard work! It does seem rather insignificant when she puts it that way.

But the truth is that she takes home something close to $3,000 (after taxes) a month and spends $120 of it on lattes. My point is this: $4 out of $50,000 (.008 percent) is a lot different from $120 out of $3,000 (4 percent). We think of our income and expenses in unrealistic terms.

Do you know what happens to every penny of your paycheck? You know where the big amounts go, like the mortgage payment or maybe the utilities. But what about the $200 ATM withdrawals you often make? Where does that money go? How much are you spending on groceries and other food to feed your family? How much do you spend in a month on something as benign as new apps for your phone? Or, speaking of phones, what is that data plan costing you each month? Gasoline? Auto maintenance? Movie tickets? Video games? Fast food? Clothing? Gifts?

If your employer made a new rule that your paycheck next month would be equal to only the amount of this month’s check you could document with a list and receipts, how close would you come to getting a full paycheck next month? I think you would be motivated to find out where all the money goes!

I believe I can safely say that money is leaking out of your life. It might be only a dollar here and fifty cents there, but it is happening day in and day out. Like a dripping faucet, it doesn’t seem like much when it is only one drop at a time, but stick a bucket under there and look again in the morning. You will be amazed at how that tiny leak can accumulate into something significant.

You will never reduce your expenses effectively and consistently until you find out where your money goes. Only then will you be able to take the steps necessary to get your spending in line with 80 percent of your net income.

In this chapter, you are going to learn how to create a monthly Spending Record. This is necessary in order to create a monthly Spending Plan in chapter 9. I will refer to your Spending Plan quite often in this chapter in preparation for what will come.

Oh, Please . . . Anything but a Budget!

For me, the word budget is like fingernails on a chalkboard. It screeches confinement, deprivation. Like a straitjacket. Or worse, a diet! (Am I the only one here with budget issues?)

A plan, on the other hand, is a detailed strategy designed to help you accomplish a specific goal. Psychologically, there’s a huge difference between a budget and a plan. Budgets confine, plans liberate. Budgets are fixed, plans are flexible. Budgets are absolute, plans are guidelines.

If a budget were an article of clothing, it would be ready-made, off-the-rack, with the dreaded one-size-fits-all label. But as a Spending Plan, it would be a custom outfit with exact measurements from the hands of an expert tailor.

In the same way an architect “builds” a house on paper long before the actual construction begins, you need to design a Spending Plan on paper for how you plan to distribute your income. A Spending Plan directs spendable income the way a conductor directs an orchestra. And you are the composer. You are going to write the score.

If you’ve ever attempted to create a budget in the past (who hasn’t?), you probably took out a sheet of paper, wrote down your expenses, and ran a total. Then you jotted down your income, deducted your expenses, and remarked while scratching your head, “So what’s the problem?” For most people, the situation looks great on paper. But usually that information is nowhere close to reality.

Perhaps you’ve met with a counselor or taken a class on money management so you could get on a budget. You sliced the pie charts and tried to cram yourself into the bar graphs and rigid framework that had “Budget” plastered across the top. Like getting into a new pair of jeans two sizes too small, with a lot of struggle and the equivalent of starving yourself, you finally got that budget on, but you couldn’t move. You tried to “wear” it for a while but gave up because it just didn’t fit. It was impossible.

So much for budgets.

Maybe it’s semantics, but for whatever reason, my experience is that budgets just don’t work. So let’s forget the b-word. Instead, I am going to teach you how to create your own custom Spending Plan—a system that will fit you and your situation perfectly. But more than that, it will remain flexible and fluid so it can move and grow in the same ways you will change and develop in the future.

Think of developing your Spending Plan as a five-chapter process. In this chapter, you will learn how to establish your spending baseline with a Spending Record. In chapters 6, 7, and 8, you will develop the infrastructure of your Spending Plan with a Contingency Fund, a Rapid Debt-Repayment Plan, and a Freedom Account. Think of these elements, beginning with the Spending Record, as necessary components of the Spending Plan you will put together in chapter 9.

Your Spending Plan will be a one- or two-page document more user-friendly than you ever dreamed possible. You will come to think of it as your crib notes because it will hold all the secrets for how you are going to manage your money to get out of debt, live financially prepared even for the unexpected, and be on your way to financial freedom.

The Spending Record

The first thing you need to get started is an accurate record of your spending. To begin, you are going to create a monthly Spending Record. There are two critical pieces of information you need to prepare this:

1. your average monthly net income

2. a detailed record of where that income goes

If you don’t have this information readily available, join the crowd. Most people do not know their average monthly net income, nor do they know with certainty where all their money goes. In fact, most of us would just as soon not have to deal with this information.

The time and commitment required to do this will be worth the effort, so let your fears go and let’s move ahead. Do you recall the “article of clothing” analogy a few paragraphs above? Your Spending Record is the “fine fabric” from which your Spending Plan eventually will be created. This information is absolutely critical to the process.

Monthly Income

Your first order of business is to determine your total average monthly net income. This is what you actually bring home once all the deductions (whether mandated by law or chosen by you, as in the case of a retirement plan) have been made. Your net income is what you can count on every month.

Regardless of your payroll schedule or the frequency with which you receive other sources of income, you need to come up with your average monthly income. Note: If you are self-employed, don’t assume this does not apply to you. As an employee of yourself, you need to put yourself on a strict salary so you can afford to pay yourself during both good months and those that are lean. Now use that salary to proceed. (See chapter 12, “The Irregular Income Challenge,” in my book Debt-Proof Your Marriage for a detailed plan for dealing with the thrill and agony of self-employment.)

Here’s a quick formula to determine your average monthly income if you receive it other than once a month:

Determining your average monthly income can get a little tricky depending on whether you have more than one income in your household, how often you are paid, and if you have additional sources of income you can count on. If you and your spouse have more than one income and you are paid on different schedules, calculate them separately to come up with the monthly figures and then add those numbers together to come up with one figure. When you get that number, take a moment to be either shocked or delighted, but keep your response as nonemotional as possible.

Once you determine your total average monthly income, write it down. Concentrate on it. Begin now to replace your prior idea of your annual gross figure with this more realistic monthly figure.

Where Does It Go?

Determining your average monthly income is a cinch compared to your next task. Discovering what happens to your average monthly income will be a challenge. I’m not going to sugarcoat this step. It will be tedious at times, emotionally threatening, and basically a pain in the neck. But I know you are up to the task. I have more faith in you than you could possibly imagine. I base my confidence on the fact that you’ve come this far in the book and appear to have every intention of going the distance.

The goal of this step is to account for the money that comes into your life—all of it. I know that sounds radical and nothing close to the way you may define “financial freedom.” That’s because we have a way of equating financial freedom with not having to think about the money we spend. This is an unrealistic expectation.

The truth is that not thinking about where the money goes is the fast lane to financial doom. Anyone who enjoys financial freedom will tell you that the only way to achieve it is to know what happens to every dollar and be very reluctant to see it go bye-bye. Financial bondage is the result of spending without limitation. Submitting to reasonable boundaries and limitations is the key to freedom—freedom from both want and worry.

If there was a way for you to reconstruct your spending over the past few months so you could see where all your money goes, that’s what I would ask you to do. But if you haven’t been tracking your spending, that would be impossible. Sure, you can come up with the big amounts such as mortgage payments and other items for which you have a paper trail of canceled checks and account statements. But as big and important as those expenses are, they alone do not give an accurate account of what happened to your money.

The only way to find out is to begin tracking.

The Daily Spending Record

Right now you are in a financial fog. You have no idea where all your money goes. You’re going to lift this fog by creating a Spending Record (not to be confused with a Spending Plan). For the next thirty days, you are going to write down every single expenditure you make, no matter how small or seemingly insignificant. The goal is to see in black and white where every bit of your monthly income goes. To the penny. Every dime. This is the only way to get a realistic picture of your current spending situation and habits. The more detailed and specific you can be, the more prepared you will be when you move to the next step.

While you can start doing this at any time, you need to make sure you track for at least one calendar month. You can simplify things if you think of every month as the same regardless of the total number of days in the month, like this. Days 1–7 are always week 1. Days 8–14 are always week 2. Days 15–21 are always week 3. Days 22 to the end of the month are always week 4. You can see that week 4 will have anywhere from six to nine days depending on which month it is, but that’s okay. Always treat every month the same.

The debt-proof method also deals with your income on a monthly basis, even though it is quite possible you receive your income on some other schedule. I have found that biweekly (or semimonthly) seems to be the more common way people are paid. However, for most of us, our expenses are billed and paid monthly (i.e., rent, mortgage payments, credit card payments, utilities, and so on). I could have chosen for you to work on average weekly net income figures and weekly expenses, but I’ve determined that would be more difficult. Choosing a monthly time frame makes the most sense. Of course, you can make your own adjustments later after you become more familiar with the process. For now, however, we will use monthly figures for both income and expenses.

You are not making changes in your spending habits yet. This tracking exercise takes a snapshot of your spending habits and shows exactly where all your money goes.

You may be thinking, “I hate this!” Boy, can I identify. It may feel for you as it did for me, like being called to the principal’s office or getting a letter and seeing IRS in the top corner. Believe me, I know how this feels, and at first it feels horrible. But I also know it’s not going to be as bad as you may be thinking. It’s like going to the doctor or the dentist. The anticipation is worse than the reality. What you are going to learn is simply where the money goes. Your Spending Record is about research and observation. And it couldn’t be simpler. Really. You’re going to be amazed.

Getting Started

You (and your spouse, if you’re married) need a notebook, index cards, or (my favorite) business cards that are blank on one side. You probably have something like this already. Use what you have; don’t run out and spend money on supplies. The point is to come up with a way you can conveniently and discreetly record your spending.

Each day, you (if you have a partner, both of you need to do this) will start out with a fresh page or card. Put the date at the top. Throughout the day as you spend cash, swipe plastic, or write a check, jot down two details of that transaction: What for? and How much? That’s it. If it’s for coffee that costs $1.50, record: Coffee: $1.50. When you buy gas, write down: Gas: $222.59 (Ha-ha. You can see I live in California, where gasoline prices are insane!). Regardless of the method of payment, write it down. One page or card per day, every day. No days off, no endless details, and no daily totals. Just two-part entries.

If you have automatic payments deducted from your bank account, be careful to include these on the days the money leaves your account. You may need to make a few phone calls or log on to your bank’s website to see exactly which payments you have authorized and when they are deducted from your account.

(Note: Recording your spending in the manner outlined above will not take the place of recording your checks and ATM activities in your checkbook register. Your Spending Record is in addition to, not instead of, the way you’ve been managing your bank accounts in the past.)

Designate a place (a drawer works well) for your daily records. This should be a convenient place where both of you can deposit your daily Spending Records at the end of each day.

Let me predict some things that are going to happen, if not in this first week for sure in the weeks that follow.

The first two or three days of recording your expenses will be awkward at best, challenging at worst. You may feel like you’ve regressed to childhood and are under the authority of a stern parent.

You’ll look for shortcuts, like not writing down purchases at the time you make them but intending to write them down later when you get home. That’s a shortcut that will sabotage the effort. Trust me, you won’t do it. Not out of rebellion so much as out of forgetfulness.

How do I know this? Because I’ve been exactly where you are, remember? We are a lot alike, I’m sure of it. Believe me when I say you need to record each transaction as it happens—as you stand at the checkout, before you put away your wallet or purse, before you walk back to your car. You need to take five seconds to write it down at the very moment the money leaves your possession. This is why I don’t suggest a three-inch-thick three-ring binder for keeping track of your spending. Anything the size of Nebraska is too cumbersome and embarrassing to haul around. Keep it simple and you’ll improve your chances of sticking with the program.

You will be tempted to cheat. At first you’ll cheat by omission—simply forgetting to record transactions. But you will consider more serious transgressions too, as in, “I shouldn’t have to write down how I spend my own money.” Wrong. You must record every expenditure regardless of the source. You will be tempted not to record embarrassing or “personal” expenses like three runs to McDonald’s or enough lattes to float a small ship. You’ll want to hide those eBay auction items you won that you pay for through online services like PayPal. Or any number of other things only you know about. Cheating in any of these ways will only delay your progress.

If you are doing this as a couple, you are going to be more interested in your partner’s daily records than your own. You will be tempted not only to review but also to comment on, criticize, and question what your spouse has recorded. Do not do this. There will be a review time soon enough. For now, don’t question, don’t nag. Just keep recording.

After a few days, something amazing is going to happen. You will begin to wake from your “spending coma” to see all the ways money leaks from your life. That might feel great or somewhat painful. And don’t be surprised if you change your mind about buying something because it’s too much trouble to write it down or too embarrassing to own up to it in writing. While I don’t want you to change your spending patterns in anticipation of creating your Spending Record (we’re looking for a realistic picture of your money situation), rethinking and refocusing in this way is excellent. You should see it as the first sign of progress.

First Week Review

At the end of week 1 (seven full days of recording), take your daily records and merge them into a week 1 Spending Record by combining like expenses. For example, if you went to the grocery store seven times and your spouse went once (Ha-ha . . . it’s a joke, but then again I must admit that I used to go to the store nearly every day), add those eight amounts together to come up with one figure for groceries. If you have entries for payments to two credit card companies, combine them under one category such as “credit card payments.”

Continue to combine your spending entries into categories until each entry has made it from the daily Spending Records to the week 1 Spending Record. Depending on the week, this could be quite simple or quite complicated. That’s okay. Just take it one step at a time, avoiding the temptation to combine many things into that famous catchall category “miscellaneous.” You want to be as detailed as practical while keeping it simple. Once everything is on one sheet of paper, calculate a spending total for week 1. Put this away in the drawer. For now, don’t stop to evaluate it or even discuss it with your spouse.

Continue with your daily Spending Record, and at the end of day 14, create your week 2 Spending Record. Continue in the same manner for week 3 and week 4.

The Monthly Spending Record

Once you have four weekly records, you have the ingredients for your first complete monthly Spending Record. You are not going to merge the weekly records but rather list them side by side according to categories. You may need to combine categories at this point in the event you got too detailed back in the earlier weeks.

After you create totals for individual categories that reflect the amount spent in a month, you must face the big question: How does your spending compare to your average monthly income? I will not be terribly surprised if spending exceeds income. The only way that can happen is if you are putting some of your spending on credit cards, an activity you’ve been programmed to do.

You should find your first monthly Spending Record quite revealing, although it is not an altogether accurate picture. Undoubtedly, you have expenses that don’t show up here because they do not occur regularly each month in the same way your mortgage payment and telephone bill do—expenses like vacation and Christmas. Or how about clothing? That’s not a fixed amount every month in the same way your car payment is.

You have many irregular, unexpected, and intermittent expenses. It’s possible you had a big, unexpected expense during this first month of recording that made this month appear to be unusually expensive. A single monthly Spending Record is a wonderful first step, but there is no way it will give you a true overall picture.

In the chapters that follow, we’re going to take care of this problem. There is a way to make every month more realistic.

Money Leaks

As you study your first monthly Spending Record, look for leaks—places where money is pouring out of your life. The first place, not surprisingly, is probably in the area of food. This is why I suggest you break down food into several categories such as groceries, fast food, school/business lunches, and restaurant dining. I’ve seen Spending Records where fast food represented more than a leak—hemorrhage would be a better characterization.

Your assignment for now is to identify all the places where money is leaking and to come up with a way you can plug those leaks in the coming month. As you look at the totals for various categories, mark those that can be reduced significantly. In the same way that all of those small expenditures add up, reducing lots of areas by a small amount will also add up to something significant.

Remember, your Spending Record is just one piece of the puzzle. If you were to move forward into next month assuming your expenses will be the same as the month you just tracked, you will be setting yourself up for a disaster. That’s because you don’t have all the pieces to the puzzle!

In chapters 6, 7, and 8, we’re going to develop the other important puzzle pieces. Then in chapter 9, using all the pieces, you’ll be ready to put together the complete puzzle of your first Spending Plan—your own unique debt-proof living blueprint.