Personal Finance Advice: Being Broke Ain’t Cute: Understanding Your Spending Habits

Madame X, from the popular personal finance blog, My Open Wallet, gives us tips on how to track your spending to get a better understand of your finances.

Here’s a “back to basics” rule that always comes in handy!


I think one of the most important keys to managing your finances is to be aware of what you are really spending money on. Think about it—whenever people complain about being broke, don’t they always say something along the lines of “I swear, I just don’t know where it all goes!”

There are so many things about money that are unknowable and unpredictable. You can strategize and make educated guesses, but no one really knows what the performance of an investment will be, where interest rates will go, how tax laws will change, or whether they’ll get a raise. But one thing you CAN know is what your own spending and savings habits are, and for most people, it’s probably a pretty good starting place to figure out what they will be in the future, or how best to change them. Once you know what is knowable, then you can worry about the guesswork.

First of all:

  • Keep Records

First of all, make sure you are saving all your credit card bills and bank statements. You should be doing that anyway! That’s the easy part. What’s harder is to start tracking how much cash you spend. Keep a little notebook, or jot things on your daily planner or in a PDA. (I enter every penny of cash I spend into Pocket Quicken on my Palm, and then upload the transactions to the desktop version of Quicken, where I enter or download all my other credit card and bank transactions.) Even if you sometimes forget, just do it whenever you think of it. You’ll start to realize that you probably spend cash on the same things quite often, so you’ll start to see patterns. For every dollar you jot down, that’s one less dollar whose disappearance will be a mystery later. Once you have these records of what you have spent,

  • Look at your spending records and total them up by category.

I think a software program such as Quicken is a great investment, but you can also easily create an Excel spreadsheet or two that will serve the same purpose. Before I had Quicken, I used to do a big spreadsheet once a year. I’d sit down with my bank statements and credit card bills and enter all the transactions and sort them into broad categories. For checks and credit card expenses, it was easy to see what I had spent the money on. For cash, it was harder, but I totaled up all my ATM withdrawals and then thought about all the things I tended to buy with cash—I multiplied out what I tended to spend on breakfast and lunch and subtracted those from the total. I subtracted an amount for laundry. Whatever was left was just categorized as miscellaneous. It wasn’t very accurate, but it was a start.

Think about the categories your expenses fall into—which ones are fixed expenses, such as a mortgage payment. Which ones are variable expenses, such as clothing? Which ones are necessities and which ones are luxuries? There is no one right way to do this—think about what makes sense for you. Instead of just having a category for Books, for instance, you might want to have a category for Education and another for Entertainment. The cost of a book about how to start your own business might be put under Education, but a Danielle Steele novel would go under Entertainment—you might want to think about what expenses are investments in your future in some way, vs. just throwaway spending on something with only temporary value.

  • Analyze the data

Once you have a system for collecting the data and sorting it into categories, look at it! Think about it! Play with it! You may be surprised at what you learn. Maybe you didn’t realize you were spending just as much on buying lunch every day as you were on clothes. Maybe you didn’t realize your cable TV bill was 5% of your take-home pay. Maybe you didn’t realize you’d forgotten to include an awful lot of things when you came up with that supposed budget you were going to follow.

This is where Quicken can make things really fun, because of all the reports and graphs you can easily run. For example, a few years ago, I started hanging out with some new friends I’d made, who happened to enjoy good food more than some of my other friends, who I also didn’t see as often. Here’s a rough illustration of what I discovered:

The green arrow represents when I met those new friends, changed my social habits and started eating dinner out more often and more expensively. The shape of the red line representing my net worth is a bit exaggerated, but it just blew my mind how noticeable it was that I was saving less money just because I had started hanging out with different people! So you can bet I dropped them like a hot potato!

Ok, I’m kidding—I did not really sacrifice my friendships on the altar of personal finance, but it did make me think we should maybe start doing some at-home dinner parties more often instead of blowing so much money at restaurants!

For other people, graphing net worth vs. friendships might be irrelevant, but if you can look at how your spending changes throughout the year, how much you spend in different categories, whether you’re saving money each month or constantly in the red, you’re bound to learn something about yourself. (And though analyzing your spending is a good place to start, don’t forget to look at your income and investments too.) In the long run, that awareness will help you make decisions and align your actions with your priorities and goals, whatever they may be.

Madame X’s bio: I am a 30-something single woman living in Brooklyn, NY. I write about how much money I make, what I spend it on, how much I save, how I budget, my home-buying experiences, my financial goals and ambitions, my thoughts on class and what it means to be rich or poor, and anything else that relates to money.

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