The Guide to Budgeting: How to analyze your spending habits?

A budget is a great financial tool to gain control and insights into your spending habits. Personal finance articles love using the "budget" buzzword; however, these same articles fail to mention the steps needed to develop an effective budget. Budgeting is not an easy task. Budgeting requires tracking, analyzing, and understanding your personal finances and expenses. By mastering the financial technique of budgeting, you will gain control of your financial situation.

In my guide to budgeting series, I want to discuss money and finances in a manner that focuses in on the various techniques and methods people utilize to build wealth and financial stability. I am passionate about money management and spending habits, and so, I want to share my insights about financial control and financial decision making. In doing so, I hope to answer the most popular questions asked in the personal finance category. The questions: How do I cut costs? How do I lower my expenses? How to spend less money?

Each question is of course asking the same thing. We want more money and less expenses. Well, the good thing is if you are reading this post, you have taken the first step in mastering your personal finances.

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The Guide to Budgeting: What are the initial steps in developing an effective budget?

As mentioned, budgeting requires tracking, analyzing, and understanding your personal finances and spending habits. In my opinion, you cannot create an effective budget until you have developed a system to track and analyze your expenses. Therefore, in this guide to budgeting, I want to detail how and why you should analyze your spending habits. Specifically, as it relates to your spending habits, I will discuss: how to spend, how to track, and how to analyze.

How to spend?

The first discussion point in tracking and analyzing your spending habits is to discuss how you should spend your money. To clarify, I am referring to the methods in which you pay for your goods and services (i.e. expenses). You need to be organized in the way you spend your money. It helps in expense organization if you use debit and credit cards. In my opinion, you should always use credit cards when possible but that is a discussion for another post. If you use debit or credit cards, all your spending will be tracked and organized for you on the card's website. This will allow you to view each expense online as well as export your spending activity into excel or CSV files. The ability to export your spending activity helps significantly in tracking and analyzing your expenses. If you purchase things with cash it is a lot more difficult to keep track of all your expenses. 

Now, I am assuming you already use debit and credit cards for most your spending, and so, it will be easy to continue that spending method. However, I am also assuming that some of you simply pay off your credit card bill without looking at your spending activity and/or credit card statements. This is something that will have to change. The act of looking at your debit card or credit card spending activity is important for two main reasons. First, it ensures you did not have any incorrect or fraudulent transactions on your card, and second, it leads you to the next necessary step in creating an effective budgeting tool. That next budgeting step is tracking your expenses.

How to track?

Now that you have organized your spending, you can now begin to track your spending. As I mentioned above, you will utilize the website of each of your debit cards and credit cards. All these websites will give you the ability to view and export your spending activity. You should export your spending activity in excel or CSV format. This will give you the ability to create an expense tracking spreadsheet. I suggest building your expense spreadsheet in Microsoft Excel; however, if you do not have Excel, Google Sheets should function similarly.

You should build the spreadsheet to serve as both an expense tracker as well as a budget. The spending spreadsheet should be organized in a way that allows you to track expenses by date, vendor, type, etc. The format and capabilities of the expense and budget spreadsheet depends on your wants and abilities in Excel. For spending analysis purposes, it is best to organize the spending data in a manner that allows detailed analysis. 

It is important to note that while the tracking stage of the analysis is easy, it does require consistent effort on your part. You need to spend the necessary time to export and consolidate all your spending data. However, by doing this, you will have the ability to gain understanding about your spending habits in order to enact positive change. This positive change comes in the next initial budgeting stage.

How to analyze?

The last step is to analyze your expense data. At this point, you organized your spending habits by using debit and credits cards and exported the account data each month into your budget spreadsheet. By using the capabilities of Excel, you will now be able to analyze your expense data. 

The spending analysis you conduct is of course at your discretion; however, I do have some suggestions, which will focus on more basic spending analysis due to the varying levels in Excel competency. Again, Excel is a powerful budgeting tool so please use your abilities and creativity in developing your spending analysis features.

To begin, I suggest starting with totaling your expenses each month and comparing that total to your monthly income. If your expenses exceed your income in a month that is a red flag that requires further analysis to determine the drivers of the excessive spending. This relates to the next level of spending analysis. Next, you should define each spending transaction based on a set of categories. For example, you may define a McDonald's expense as "restaurant" or "fast food." Once defined, you should total your monthly spending by category. Similarly, you should also total your monthly spending by vendor. For both category and vendor, if any amount seems excessive, you may consider adjusting your spending habits accordingly.

Additionally, after some time of tracking and analyzing your spending habits, you can form a sold baseline about your spending habits to develop an effective budget. At this point, you will have a strong understanding about your average spending totals by category each month. The average spending totals will help you set realistic budgeted totals as well as give you insights into spending areas where you may want to decrease or increase spend each month. 

After all these initial steps, you will hopefully have developed an effective budgeting tool. As a result, the budget should provide further motivation to avoid excessive spending and encourage cost savings. By continuing to update your budget spreadsheet, you will continue to have timely insights into your evolving spending habits.

A truly believe by following the steps in this guide to budgeting, you will start developing strong personal financial skills. For any and all questions, please use the comment section below. Happy budgeting!