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Where did your money go?

As a field training officer, I am occasionally entrusted with turning the raw bundle of knowledge and enthusiasm known as a recruit into a confident and competent police officer. When a recruit sits in my cruiser for the first time, he (or she) most likely knows little about our beat or sector. He does not know who the prostitutes and drug dealers are; he may not know what a "tour guide" is; he probably does not know which streets have the heaviest drug sales. So, he spends his first night driving up and down the main roads, because it is comfortable and he can stay oriented. This inevitably makes me crabby because we will waste lots of time and fuel doing nothing but spinning the wheels. Therefore, I direct him to the high-activity areas; I have to show him how to focus his efforts efficiently.

Whether it is working with informants, noting changes in street traffic, or reviewing CompStat maps, we cannot imagine working without knowing what is happening where. At work, we demand knowledge. In our personal lives, though, especially our financial lives, many of us have no idea where our money went. We waste lots of time and money doing nothing. If you want to save and spend effectively, you have to know where your money is going, and focus your efforts efficiently.

Tracking in police work evokes the image of a partially crazed, 90-pound Malinois, straining against a thick leather lead as he drags his handler in hot pursuit of a bad-guy. It shows you where the criminal has gone so that you can stop and arrest him. Tracking in finance lacks the dog, but accomplishes the same task: it shows you where the bad spending habits are so you can stop and control them.

You cannot control bad spending if you don't know you have it and the only way to find bad spending habits is to understand where you spend your money. The cheapest way to tracking your habits is to spend 59¢ and buy two school notebooks at any store. Then, every time you spend money, write it down in one notebook. Write down where you spend it, how much you spend, and why.

The why is to help you identify categories, rather than provide psychological insight to your money habits. You don't have to write, "I had a bad day and wanted an ice cream cone to unwind." It is quite sufficient to mark your spending for eating out. Other categories would include clothing, uniform cleaning, fuel for your car, home insurance... literally every general category of how you spend money.

Your categories should be general enough that you don't have 500 of them, but also specific enough to help you find patterns. For example, eating out and groceries should probably be two different categories. Knowing how much you spend eating out versus eating in can help identify a pattern. You probably don't have to break eating out into smaller categories of fast food, sit down, fancy and convenience items.

Total the amounts on each page for each category and keep monthly totals (broken down by week, if you like) in the other notebook. The goal is to keep your monthly totals separated and easier to review. This shows you exactly where your money is going... every day... every week... every month.

Obviously, technology can make this effort much easier. I have used Quicken (by Intuit) for approximately 15 years. I don't know that it is the best, but it meets my needs, I understand it and I use it regularly. Not only does it track my spending and set up budgets based on my spending history, but it tracks my 401(k) investments and my other assets as well. It also has calculators for evaluating retirement plans, house-refinancing options, and the like.

There are plenty of personal finance software products out there for less than $100. You can buy one and have it take over the role of your 59¢ notebooks.

Once you know where your money is going, you can start to control it. This process is very personalized, as each of us spends money differently. We also have certain expenses that are critical to us, but might be wasteful to someone else. Sand paper and stains might be critical to you if your passion is refinishing furniture, while someone else might find camping and hiking supplies to be much more important.

The key is to see how you are spending money, that way you can budget it and control it. Your passion may be fishing, but when you see you are spending $1,500 a year on new gear, you may see a problem. You might love woodworking, but the $2,000 you spent on new bits, tools and accessories could be a little overwhelming.

Once you see where your spending is, you can start to develop your budget - your plan of where you want your spending to be. This is your control phase; this is where you start getting your financial house in order. There is nothing wrong with spending money on eating out, movies, or fishing gear. There is something wrong when you spend so much on these activities that you are not saving money, or that you are running up your credit card to finance your way of life.

Your budget helps you focus your spending, targeting your efforts against the bad habits. Focus, whether at work or in your finances, helps make sure you are not wasting time just spinning the wheels. That keeps you from getting crabby because, really, isn't life too short to be crabby?