Step Three - Know your expenses
Recording all of your expenses can be a real eye-opening event. Doing so can help you figure out where you may be going a bit overboard. Now that you have identified your goals and income, it is time to figure out where your money currently goes. I won't lie to you...... this is the hardest part of the spending plan process. It takes motivation and patience to do what is necessary to gather the information that you will need to truly understand your spending habits.
How much money do I spend?
Tracking your money may sound like a simple task, but you may be making more transactions per day than you realize. The truth is most people just don't remember the little things. Now forgetting about a dollar here and there is not necessarily a problem, but if you are really tight on cash it could be catastrophic. To be completely effective in this process you will need to keep track of every penny you spend.
Here is a scenario: Moe has classes all day. Moe grabs a coffee and donut from a moderately priced coffee shop on his way to school. After a few classes he eats the snack that he brought for himself, a peanut butter sandwich and a piece of fruit. He decides to get a soda to go with it, and to get a caffeine boost. Moe has a night class starting in an hour. He has enough time to go grab some food with his friends. They decide to go to a cheap sandwich shop. Moe gets a meal and goes back to school. The day is over and Moe goes home and relaxes for the night. This is a pretty common day in the life of a college student. Moe spent between $12 and $25 today. If he did that every school day he could potentially spend $600 a month, not even considering the other living expenses like rent, groceries, gas, or any bills. If Moe is living off of student loans he may find himself out of money before the semester ends.
What areas do I spend too much money?
Once you have identified where your money goes, you can analyze yourself. This sounds easy but is the hardest step in this entire process: really looking into yourself to find the areas where you can cut spending. The basic criterion for this decision can break down to "needs vs. wants". Not everything you buy is going to be a need. It is important to make the distinction of when you truly NEED to buy something. You need to eat food, drink water, and wear clothes. That being said you don't need to eat caviar, drink a $4.00 bottle of water, or wear Gucci. When looking at your spending it may be important to understand this question.
From here you can see where a good chunk of your money goes. If you are spending 50% of your money on anything that you don't need it may be easy to identify the area of concern. The problem is the answers are generally not that easy to locate.
For this step to work it is important that you are honest with yourself. When tracking your expenses it is important to be specific, as well thorough. Learning your own habits will go a long way in this process.