Personal Finance

Andrew Menachem: Take control of your finances by managing your spending

It's difficult for many people to start a savings and investing program. They spend their dollars quickly and live from paycheck to paycheck, leaving themselves vulnerable to an unexpected expense, like a big car repair bill or a child's medical problem.

Without a cash reserve, too many Americans rely on their credit cards to balance their monthly budgets. Last year, total U.S. credit card debt rose about $17 billion to reach $700 billion at year-end, according to the Federal Reserve Bank of New York.

But there is an excellent strategy for getting out of debt, starting a savings program and taking control of your finances. It's called managing your spending, and it is the key to success for many people.

While that's a simple concept, it's not always easy to put into practice. It requires a change in attitude and behavior, so you don't spend every dollar as soon as you get it.

But your journey to financial stability can begin with a single step: tracking your current spending.

Take a few minutes and create a list of all the ways you spend your money each month, such as rent, groceries, wireless service, restaurant meals, credit card payments, travel, etc. Don't worry if you forget something, because it's easy to add new categories as you go along.

It's usually a good idea to divide your list into two sections. First are the expenses that you have to pay every month like your rent, car loan or electric bill. In the other section are all your discretionary expenses, like restaurant meals, travel and movies. That can help you distinguish between your financial "needs" and your "wants." When funds are tight, paying the necessities should always come first.

The next step is to track your daily spending. Every time you spend cash, write a check or use your debit card, record the amount and category (groceries, gas, etc.) Carry a writing pad with you so you don't forget, or download an app for your smartphone or tablet that can simplify this process.

You can write down your credit card charges, but don't put them on your spending list until you actually pay those bills

Once you have your tracking system in place, spend a month just gathering data and watching where your money goes. Most likely, you will be in for a surprise or two, particularly with your discretionary spending.

For instance, you might not realize that spending $50 twice a week on restaurant meals requires $400 or more of your monthly income. While food is one of the necessities of life, buying groceries at the supermarket is usually much less expensive than dining out.

Once you have a clear picture of your spending habits, you can start to make some adjustments to help your wallet. For instance, spending $50 at a restaurant once a week, rather than twice, would give you an extra $200 each month. That's more than enough to start a saving program, and begin to build a financial cushion for those unexpected expenses.

Don't worry about how much you can save each paycheck – it's more important to make that basic change in your spending habits.

So, consider adding a savings account to your checking or debit account at the bank. That makes it easy to start putting your dollars away for the future.

Meanwhile, keep tracking your spending every month to help you stay on the right track. And don't forget to add a new "savings" category to your list as well. Soon, your money will be working for you.

Andrew Menachem, CIMA®, is a Wealth Adviser at The Menachem Group at Morgan Stanley in Aventura. Views expressed are those of the author, not necessarily Morgan Stanley, and are not a solicitation to buy or sell any security. The strategies and/or investments referenced may not be suitable for all investors. Follow Menachem on Twitter @AMenachemMS.

Money management apps

Many banks have apps that will help you track your money. Other free options include:

  • For a simple, manual-entry money app, try Pocket Expenses, a free app for IOS (iPhone.)
  • Expensify lets you photograph and then categorize receipts; you can also enter expenses manually. Also free, works on both smartphone platforms and web browsers.
  • HomeBudget allows you to easily see what percentage of income you’re spending various catetories.