All personal finance advisers start by asking some basic questions about your spending patterns.  Do you feel stumped when asked what you routinely spend on groceries?  Dining out? Coffee or clothing?  Do you find you often have month left at the end of your money or that you have forgotten to pay a bill on time?  Do you wish you could change your spending patterns, but you don’t know how?

For years – yes really years – I have “religiously” tracked our household expenses.   This has helped our family to balance the budget (i.e. not run out of money before the month is over) and most importantly to make decisions based in REALITY.  As the saying goes, “knowledge is power” and knowledge like this gives you financial decision-making power.

So how do we do it?
Virtually all our expenditures are made on a credit card, which is paid off monthly.  This makes collecting a receipt with every transaction easy.  My spouse routinely hands over his receipts – everything from his $4 latte indulgence to his latest gas purchase.  (He’s well-trained!)  Once in a while I have to ask him how to categorize a home improvement store purchase.  And now after many years of tracking these things I could probably collapse some categories, but wouldn’t you want to know where your home improvement dollars are going? Or how much over time you have shelled out for camps, lessons and school supplies?  Perhaps when my children are grown I can add to that body of literature on the cost of raising a child with data from a real family!

Back to the tracking.  The trick – for me at least – is a good program.  Gone are the days of a loose leaf notebook or even an excel spreadsheet.   (Although it is fun to pull out the yellowed page from our first year of marriage and reminisce about that low car payment…)

Quicken provides an easy way to do home-based accounting.  If I have input my income, regular bills and every receipt – which you have to do to balance that Visa statement each month – I can provide all kinds of data for decision making.  At the touch of the reports button I can tell you our net worth, and whether or not is it going up or down.  I can see how spending this month is headed compared to a running average over the past 6.  Or I can review investments over time.

The spending page provides a wonderful pie chart graphic – you choose to see a month, a quarter, a year or some other customized period of time.  Here you can drill down in the graphic and see what expenses created each piece of pie.

On the bills page I can see when the next bills are due.  And the forecast provided there will tell me if there will be any money left at the end of the month.  I can also see, at my current rate of spending, when there will be some spare cash for a larger purchase.  The key is that the forecast I have is based in reality.

In 2000 we chose to make a life style change: we left the home that required a mortgage, took our children out of daycare and reduced numerous other costs associated with living in a city and moved to the mountains!  We knew we could make ends meet, because that lifestyle change came with realistic data about expenses we made every month over a lengthy period of time.  We knew there would be tires to replace, dental work and unexpected travel, but over time even the unpredictable becomes predictable.  We knew how much we really spent for groceries, clothing, and home maintenance – no mare guesstimates or swags in our decision making.

I know it isn’t for everyone, but for us it works.  Please comment with how you control spending, plan for large purchases or just generally cope with paying the bills.

A fun fact…  Over the past 12 years our family has spent $58,000 on groceries! This is less than we have spent on housing, but more than the next three categories:  taxes, utilities and leisure – yes leisure comes in about 5th – wow!  We must be having some fun!  (Or our kids are.  As I “drill down” I can see that the top subcategory is “camp” and also included here are movie tickets, trips to the pool, ice skating, and other kid-friendly leisure activities.)

So where does your disposable income go?  Do you know?