How to Find the Cracks in Your Financial Foundation

Posted Oct. 5th 2011 under General

Do have an area where spending is causing a problem? Here's a quick and easy guide to finding and filling your financial cracks.

Start With the Facts

Collect six months' worth of credit card statements and bank statements to analyze. Each transaction is categorized in order to see where money is being sent. This activity can be done at home by creating a spreadsheet or by finding an online template.

Add It Up

After you have categorized your spending, the next task is to add up the various categories to see how much is being spent on each. You may be surprised at what you find when you begin to add it all up! Some of the areas where people commonly under-estimate their spending include the following:

1. Income - any extra income aside from your regular job, such as government benefits, rental income or bonuses
2. Housing - rent or mortgage, property taxes, insurance, utilities and maintenance
3. Transportation - car payments, insurance, licensing fees, gas, parking and highway tolls and maintenance
4. Communications - cell phone, home phone, internet and cable
5. Food - groceries, restaurants and lattes
6. Entertainment - taxis, beer and liquor, health club fees, vacations
7. Kids' Stuff - clothing, lessons and uniforms, gifts for birthday parties

Calculate Your Percentages

To help analyze your numbers, use your NET income, not your gross income. The recommendation is that no more than 30% of your income should go towards your mortgage. Some other guidelines include 15% for transportation, 10% for savings and 15% for debt repayment. You may find that one area of your spending is significantly higher than these recommendations. As long as other areas are smaller, there's no problem. However, if they're ALL higher, it's time to cut back on your spending.

Look for Hidden Cracks

Do you have student loans? Are credit cards eating up a significant portion of your income? Do you spend hundreds in cash every month with nothing to show for it? Did a major purchase throw the rest of your budget off balance? Take into consideration your entire financial picture and be honest with yourself about where your money is really going.

Prioritize

Maybe you can afford a home. But, if you make $5,000 a month and you're spending $1,000 a month on movies, nights out and golfing, then 20% of your income is being spent on entertainment! That 20% is money that you might want to spend on future plans, such as purchasing a home or renovating your own.

Start Keeping Track

Writing down how much you spend every time you make a purchase will help you to be more conscious about where your money is going - even if you don't limit your spending. At least you will have an idea of what is being spent and where. Another idea is that you may also want to consider spending only cash, or only using your debit card rather than credit.

Make a Budget

Knowing how much of your money needs to go every month to cover your basic expenses will help you plan how much you have left for fun stuff.