Analyze Your Spending

One of the best things you can do for yourself to get your finances in order is to analyze your spending. A very important part of personal financial planning is understanding where all your money goes. When you know where it is going, you are more likely to make wiser financial choices, and you are more likely to develop good savings habits that can help you build wealth. So, the first step in an financial plan, whether you are just starting or trying to complete a financial overhaul, is to analyze your spending.

Keeping track of spending

For one or two months, keep track of everything you spend. Keep a ledger or record it in a computer program (my preferred method). Even if it's just a 75-cent toll you pay on the way to work or a simlple $3.19 latte that you have as a midmorning pick-me-up. Make sure that everything is accounted for. This way, you can see exactly where the money is going. Many people are surprised when they look at their spending after even just a couple of weeks. So much of it is actually waste.

Looking at your spending

After the month or two months is over, look at your spending. Divide your spending into two categories: needs and wants. Needs include obligations, such as loan payments, that you have to pay each month. Needs also include things such as transportation costs to get to work, food, clothing and housing. Wants are the niceties of life: the candy bars, the new mattress, the fun shoes. You need to be able to separate what you want from what you need. Once you can make the distinction, and actively try to avoid spending money on wants, you can start keeping more of what you earn.

Prioritizing needs

Sometimes it can be difficult to choose between needs. One way to analyze how you spend money on needs is to decide if the need is a "luxury." For example, do you need a designer shirt for $50 when you can go to a department store and get a shirt for $12? What about food? Many people buy name brand foods that can cost as much as twice as much (or more!) as generic brands. Go down your list of needs and determine your priorities, taking care to note where you could spend much less by getting a generic brand instead of a name brand. Decide what is important to you, and then see whether your spending habits match your priorities.

Make saving a goal

After you have analyzed your spending and determined where you can cut back, make saving a goal. This is important if you want to build wealth for the future. An easy way to start is to pick one category to cut back on, and then put the savings from that category into a savings account. That way, instead of wasting money, you are putting it to work for you.