Updated on 06.23.16

The Value of Doing a Monthly Financial Review – and Six Easy Steps for Doing So

Trent Hamm
going through bills

A monthly financial review can help you keep track of where your money’s going. Photo: Tim Pierce

I’m going to be blunt. It is really, really, really hard to succeed long term with your personal finances if you don’t know where your money is going. If you can’t clearly state where every dollar of your paycheck is going, then you’re begging for financial problems.

In my experience, a monthly financial review is the perfect sweet spot for keeping a grip on what’s going on financially in your life. It’s not so frequent that it feels like a burden; instead, it feels like you’re really learning something from the process. It can really help you see patterns in your spending that you might not see in your day-to-day life. It also helps you find errors and unauthorized charges.

Over the years, I’ve gradually adopted a system that works for me for keeping track of where my money is going, figuring out where my money leaks are, and . Whenever I have a transaction, I log it reasonably quickly in You Need a Budget and then… well, I basically follow the procedure outlined below.

However, not everyone has a copy of You Need a Budget or the inclination to log all of their transactions. If that describes you, here’s a great six step procedure for a monthly financial review. It only takes about an hour or so on a lazy weekend afternoon once a month and it will leave you with a much stronger perspective on your spending and the areas you need to focus on going forward.

Go Through Each of Your Bank and Credit Card Statements, Item By Item

It’s pretty straightforward. Just pull out the most recent copies of your bank and credit card statements and start walking through each transaction, one at a time.

What was that transaction? What exactly did you buy when you spent $41.87 at Target on the 23rd? Would you describe that as a household supplies expense or a food expense? Or maybe a mix of both?

Personally, I like to do this with several different colored pens. That way, I can mark each transaction type with a different color as I go along. Hobby spending might be marked with an orange pen, while food spending might be with a red pen.

What categories should you use? Choose ones that make sense to you. I like to use hobby and entertainment, food, household supplies, medicine, gifts, and utilities as my primary categories for going through my spending.

Dispute Any Unauthorized Charges

Of course, as you’re doing this, you have at least some chance of discovering unauthorized charges. These can pop up for any number of reasons – someone typed in a credit card number wrong, someone actually stole your credit card number, and so on. While retailers are pretty good at sniffing out bogus charges, they’re not perfect at it, and quite often a fake charge or two (or more) can slide right through.

If you do find a bogus transaction, call your credit card issuer immediately and get things fixed. If your card information has been stolen, getting a new card immediately will provide the best protection for you. If it’s simply a one-time mistake, the charge will be dropped. In either case, you’ll save money by not having to pay for that item that was fraudulently purchased in your name.

To find these fake charges and get them removed from your bill, there’s no substitute for the step-by-step walkthrough of your bill. Since you’re doing it anyway in order to categorize your spending, it’s like killing two birds with one stone.

Tally These Expenditures Up By Category

So, you’ve gone through your credit card bills and your bank statements. You’ve found and eliminated any and all false charges and you’ve marked the various expenditures by category.

The next step is to simply total up everything in each category. Walk back through your statements and just add up each category, one at a time. If you marked them with colors along the way, then this is another really easy task. Just look for things marked in red and add them up (and write down the total somewhere), then do the same for the orange ones, then the green ones, then the blue ones.

You’ll wind up with a list of numbers that represent your total spending for a month in each category.

Evaluate Each Category in Your Spending Picture

Now, look at those numbers. Do they seem realistic? Do they seem like they represent a healthy spending pattern?

This might be a good time to pull in other numbers, such as any savings or utility bills that didn’t appear on those statements. How do those things compare?

It can be hard to make sense of those numbers without some degree of context, but there are a lot of good budgets out there that can help with this. For beginners, I recommend using the 50/30/20 guideline.

In simplest terms, the 50/30/20 guideline means that 50% of your spending goes toward required bills (like rent, electricity, basic food, etc.), 30% goes toward wants (like cell phones, cable television, entertainment, eating out, etc.), and 20% goes toward saving for the future (401(k)s, Roth IRAs, emergency funds, etc.).

Look for Strategies for Cutting Down Your Biggest Problem Areas

The thing that most people discover when they do this exercise for the first time is that they’re often nowhere near where they should be regarding that balance.

I’m willing to bet that the first time I’d have tried something like this, I would have wound up with a split along the lines of 35/60/5, meaning that 35% of my income went toward necessities, 60% went toward wants, and 5% went toward savings. In my head, I had no idea that it was that bad, but the actual reality was a train wreck.

The next step, then, is to look for specific ways to move from where you’re at to where you want to be. If your numbers look like something akin to 35/60/5, then that means that your necessary spending is looking really good. You should strive from there to have a 3/2 split between “fun” spending and saving for the future. In other words, you’re hoping to wind up with something like a 35/39/26 split, which is a great place to be.

How can you make that happen? The most powerful step is to automate your savings. Sign up for a 401(k) at work and start contributing a real percentage of your income. Maybe open up a Roth IRA and contribute automatically to that. You might even do something as simple as starting an emergency fund at your local bank as long as you can set up an automatic transfer from your checking to your savings.

Of course, that also means that your “fun” spending is going to go down, so start looking at the ways in which you spent money on non-essential things. I vividly remember looking through my spending back in the day and seeing things like 15 stops in a month at convenience stores or 10 stops in a month at a bookstore or 15 stops at a coffee shop. Cutting those things down to one or two visits a month made a huge difference in my life, because I came to realize that I was doing those things so often that I really didn’t appreciate them. They were just the “norm” in my life – but a very expensive one that I really didn’t value all that much.

Turn Those Ideas Into a Handful of Specific Things to Do in the Coming Month

The key thing to remember is that you’re not trying to have a “miserable” life. No one is expecting you to cut your “fun” money to zero – I wouldn’t do it, nor would most people. What you’re trying to look for are changes you can make that aren’t painful but will move you in the right direction.

For your first month, for example, your checklist might include things like signing up for the 401(k) at work, setting up an emergency fund, or tackling big spending holes like getting rid of a single expensive daily routine.

As you do this a few times, you may find yourself digging in and finding more specific things to do. Perhaps you’ll spend some time in the coming month finding ways to trim your energy bill (which might shave some money off of your required spending) or learning how to cook more skillfully at home so you’re less prone to eating out, which could shave a lot of money off of your non-essential spending.

Whatever things you come up with, make it into your checklist for the coming month. Strive to achieve those things in the coming four or five weeks, then add a review of those goals (and whether you achieved them) to your review next month.

Final Thoughts

This routine is really simple, and it’s something I do every month. It doesn’t take me all that long, of course, because I’m pretty adamant about entering my expenses into You Need a Budget throughout the month, but even while doing that, this kind of monthly review still helps me uncover areas where I’m weak and gives me ideas of things I can work on.

It’s such a simple way to integrate a financial review into your life and give you real steps that matter to your situation. If you’re having a hard time understanding where your money is going, try out this routine for a few months. If nothing else, you’ll have a far clearer picture of your spending.

Good luck!

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