Spending journals are a good way to get control of your cash flow. It does require some commitment and work to keep it up to date. The resulting power that it can give you over your personal finances makes this tool a great addition to any financial planning efforts. The journal needs to be evaluated regularly. To be the most helpful, you need a plan to build a useful spending journal.
Keep two types of records.
A good spending journal needs to be built in two parts. The first is a cash diary or small spending diary. This is a record of the money that you spend for coffee or fast food. Frequently, these purchases are made with cash or a debit card. The item and amount can get lost in the shuffle. Record these small amounts as line items in a cash diary or journal. This should be small enough to fit easily into a pocket or purse.
The second part of the journal is a ledger type of record.
Any spreadsheet application can handle this. You can also do it by hand if you buy an accounting notebook with columns. Start with an inexpensive book if you go this route. You can buy a bigger one if you need additional columns. Transfer your cash diary notes into this permanent record at least once per day along with any larger spending amounts. Make sure to include any payments on loans, utilities, etc. in this ledger.
Carry your cash diary with you all of the time.
Make this diary an item that you never leave home without. If you forget it, grab a piece of paper as soon as you can and use it to record your small purchases. As soon as you get your cash diary in your hand, transfer these numbers. It may seem like a nuisance at first, but it is worth it.
Break down the spending record as far as you can.
More detail in your spending journal means that you will have more data to work with if you need it. Try to avoid writing miscellaneous as a spending type. If you do use a miscellaneous column, monitor it closely. When you see multiple times of spending for the same type of thing, make a column for it. Miscellaneous is just another way of saying: I don’t know. The idea of spending journal is to let you know how you spend your money.
Use general categories to consolidate similar spending types.
Your columns need to be named with headings that are meaningful to you. The exact names are not critical. For most people, you will need between 5 and 15 columns. Some of the names might be: Food; Utilities; Phone & Internet; Entertainment; Loan Payments; Eating Out; Clothing; Household Expenses; Personal Items; Transportation; Insurance; Savings & Investments; Medical. You may want to combine some categories if they are lightly used.
For maximum accuracy, balance your spending journal weekly to your income.
If you can account for every penny of income, you are doing a spectacular job with your journal. Do not get discouraged if it takes you a few weeks to develop the habit of recording each expenditure. Accuracy is important for the best results, but as long as you are moving closer to your goal, it will work out okay.
Treat savings and investing as a spending category.
Since saving and investing takes money away from what you have to spend, you need to count it as spending. If you take money out of savings, count it as income for that month. Do not add interest on as income unless you withdraw it to spend. It can be ignored. If you do choose to count it, it has to come in as income and exit as spending.
Stay dedicated to the effort.
Like many things in life that require constant attention, a spending journal requires commitment. If you ignore it for several days, you will decide that repairing it is an impossible task. This may cause you to abandon the effort. This is not necessary. All that has to happen is that you need to pick up from where you are and start over. It will come together as long as you do not have too many of these intervals in your records.