Where Did Your Money Go?
Where Did Your Money Go?
Most of us know how much money we make but very few can rattle off how much we spend and what we spend it on. For individuals who are comfortable financially, with plenty of money left over in the checking account at the end of each month, it may seem unnecessary to even think about this. But financial advisors recommend that in order to prepare for and manage resources in retirement, everyone (except the very wealthy) should have an idea of how much they spend each year and should document this knowledge in a spending history.
A spending history is a close cousin to the budget. They look very similar and are developed using the same data, but unlike a budget, a spending history is not prescriptive. It does not tell you what to do and you do not have to adhere to it. It is simply information about how you much you spent over a period of time, organized into categories of spending.
At least 6 months and preferably one year’s worth of spending data are needed in order to create a good spending history. The data are usually documented in a spreadsheet.
A spending history gives you the big picture and enables you to:
- Compare your spending with your income (do you borrow to support your spending habits?);
- Determine discretionary vs. non-discretionary spending (needs vs. wants);
- Project how your spending might change with life changes such as children graduating from college, retirement from active employment or death of a spouse;
- Determine how much you will need to draw from investments in order to support your spending habits in retirement.
For individuals who already use software such as Quicken to manage their finances, creating a spending history is a matter of a few clicks and a printer. If you don’t track your spending regularly consider using an electronic means of tracking such as Quicken, your online banking application or even a simple spreadsheet. With the ease of downloading transactions from banks and credit card companies, it takes a relatively short time to collect the data and categorize it.
If you haven’t been tracking and you need the spending history now, consider hiring a daily money manager to help you put the pieces of the puzzle together. A DMM will look at a year’s worth of bank and credit card statements and will collect all of your spending data from those documents. She will then prepare a spending history, noting which items are paid monthly, quarterly and annually. She can also set up a tracking system so you can begin tracking income and expenses on your own. One big bonus of regular tracking is that tax time will be easier than ever!
Creating a spending history is an eye-opening experience (who knew that all those lattes added up to over $1000 a year?) Knowing how you spent your money will empower you to make good spending choices in the future and plan for your financial needs in retirement.