Article Archive

Where Does It Go?

Finance

Issue: January 2010

One of the issues that clients often categorize as mysterious is where their money goes each year. Almost everyone says they are frugal and don’t spend a lot of money on extravagant things. Almost all guess low when they begin to recount amounts spent in different categories and fail to recall many categories when they rely on their memory for accuracy and completeness. Given it is the year has just ended, and the last year and a half of recession have dramatically impacted many of our finances, it might be a good time to put a little more rigor into knowing where our money goes. Clients who have done this report a sense of power, increased capacity and peace of mind.

When I suggest to clients that they complete a cash flow statement, I can see their eyes glaze over thinking about the amount of time they think it’s going to take to gather the data and summarize the information. Many are concerned that if they gather the information, they will be forced to follow a budget, which often has some negative connotation based upon a bad experience they’ve had in the past.

The fact is, knowing where you spend money allows you to analyze critical issues concerning your finances. When you have accurate information about amounts and knowledge of where your money goes by category, you can analyze which items will disappear and which might be reduced or expanded if you were in a recession and out of work, if you were not able to physically perform your job because of some medical issue, or if you were analyzing the amount of future assets that would be needed to maintain your current standard of living at retirement. Some expenses are discretionary and some are necessities, and it is important to know which is which when you need to make grounded assessments about your alternatives. Examining your cash flow can help you make better financial decisions each day.

I tell clients to gather together their checkbook, bank statements and credit card statements for a period that represents a full 12 months, as well as several pieces of paper and a pencil. By gathering 12 months of data, all one-time expenditures will show up in your accumulated numbers. You can write down initial categories of expenditures before you start to group them, adding others as you begin to work through your specific expenditures. I have found from experience that it’s best to label what the expenditure was for when it is in a discretionary category like gifts or vacation so that you can later make assessments about the future possibilities of that particular expense repeating itself. Without labeling you can only see the amounts that were spent and it’s almost impossible to make any useful assessment about it recurring as a future expenditure. Don’t forget cash as a category, often generated at the store or ATM.

When clients complete this practice there are two statements I frequently hear. The first is “Wow! That took some effort to put together,” and the second is “That was really interesting and I’m glad I did it!” Since it is the season when New Year resolutions are often created, what better time to promise yourself that this will be the year you actually gather the data. Good luck! It’s worth the effort!

Back to Article Archive