Why You’re Broke: You Don’t Audit Your Spending Habits

Now that I’ve outlined a top-level job description for the household CEO it is time to begin breaking down each of those six top-level tasks in a little more detail.

The biggest reason most people always find themselves broke and continually in debt is because they are ignorant regarding where their money is going.

In order to start down the road to financial freedom, the first task of the household CEO is to figure out exactly where all of the household money is going. This task is important because a detailed audit must be performed if you ever hope to truly understand your household’s monthly spending habits.

To start your audit, you will need to have an accurate accounting of all of your income as well as every penny you spent over the previous month.

Keep in mind that in order for this task to be done correctly, you will have to do some meticulous tracking of all income and outgo. Start by collecting all of your bills, credit card statements, ATM withdrawal receipts, and your check book register.

You will also need copies of all income statements for the month. Remember that income can come from sources other than your employer paycheck. Other sources of income can include food stamps or other public assistance, unemployment or disability payments, child support and/or alimony, and social security and/or other retirement payments such as a pension.

You also need to remember that there are expenses that come up once or twice a year you need to account for but might not be covered in the bills and receipts you have collected from the previous month. These include: taxes, auto servicing, tires, license fees, birthdays and holidays, educational costs, vacations, and insurance premiums such as for guaranteed issue life insurance. Do not include taxes withheld from your paycheck, but you do need to include any estimated tax payments you make to the IRS.

At this stage of the game, all you want to do is compile all of the information regarding your spending habits over the previous month. In fact, it would be advantageous to compile this information over the previous three months to help give you a better idea for atypical deviations that might have occurred from month to month. The bottom line is the more information you can gather up front, the more intelligent you will be when it comes time to create your first budget.

The information you collect from this audit is necessary for making an accurate assessment regarding what money is being spent on needs and what money is being used to simply keep up with the Joneses.

My next post will provide a step by step plan on exactly how to do that, and also provide a sample worksheet that you can use to help you categorize all of your expenses.

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