CFI Blog

Money Comes and Money Goes

This is part of a series. If you have not read the articles that build up to this one, I recommend that you do so first.

In this article, we’re going to do some forensic investigation. You may already know where every red cent comes in and goes out, and if you do, then you can skip this article. However, for those of you who have a gray spot in your knowledge of your monthly finances, this article is crucial. You can’t know where you’re going if you don’t know where you are. This isn’t going to be a long article, but the work that you have to do to get a good foundation of where the money is going may take a while, so be prepared.

Step 1: Income


In the first step, you need to identify all sources of income that contribute to the pot of money you use for monthly spending. This needs to be after-tax income, not pre-tax income. Some people say that they make $50,000 a year when the reality is that, after paying taxes, they bring home $40,000 a year. That $10,000 isn’t spendable because it went to pay taxes, so it won’t count in this exercise. Also, don’t count bonuses in this exercise because bonuses aren’t guaranteed, and in a later article, we’ll talk about how to think about bonuses and other one-time sources of cash, such as income tax refunds and inheritances.

Take your past twelve months of income and then divide by twelve to get a monthly average. If you know that your income has changed permanently – for example, you received a raise at the end of the year or your pension had an inflation adjustment – then you can use the current amount. However, for amounts that fluctuate, it’s important to take an average so that you can smooth out your spending rather than being flush one month and tight the next.

Source After-tax Amount Per Month
Social Security  
Side business  
Dividends (NOT in a retirement account)  
Retirement account distributions  

Step 2: Determine Your Expenses

Determine Your Expenses

Income is usually the easy part of the monthly cash flow equation.  Most people know when the money arrives in the accounts! It’s when the money leaves the accounts where Monkey Brain gets involved. He usually tries to get you to not notice that the 183” flat screen TV costs so much by a psychological trick called change blindness. Change blindness is what happens when something in your life is altered – usually a small change – and Monkey Brain tells you that everything looks the same, even when it really doesn’t. Think about guys who don’t notice when women get their hair cut. That’s change blindness in action. Thus, if you’re spending $500 a month on fast food, you might tell yourself that you’ve only been spending $100 a month because that’s what you used to spend.

If you use cash, then knowing exactly where you’re spending your money, unless you use an envelope system where you designate cash for certain spending purposes and never waver from it, may be difficult. The bad news is that, until you start keeping receipts and logging where the money goes, you don’t know exactly where it went. The good news is that spending cash, as we discussed in the previous article, triggers pain centers in the Monkey Brain, and helps curb your spending. If you do all of your spending on a credit card, then you probably spend more, but at least you know where it goes.

If spending solely via credit card and checks (or bank bills) is the case, tracking where your money goes should be a relatively straightforward exercise. You can do this one of two ways:

  • Look at your credit card and bank statements for the past 12 months. Manually calculate how much you’re spending and where the money is going.
  • Use a software program like Mint and have the software calculate it for you. I’m personally a fan of this method, and it’s the one that we use, but some people have different levels of comfort with going that route.

If you do some spending on cash, then you need to methodically track receipts and spending for at least a month so you know where your cash goes when it leaves your hands.

It’s important to categorize your spending, but you don’t necessarily need to go down to tremendous levels of detail, such as Monthly Cat Toenail Clipping Expenses, unless you truly want to.

Additionally, for this exercise, do not include investments and savings, such as setting aside money for an emergency fund, retirement planning, or kids’ college savings. This is meant only to track your month-to-month living costs.

Expense Category Amount Per Month
Housing – Mortgage/Insurance/Taxes or Rent  
Transportation – Gas or bus/train/subway tickets  
Transportation – Maintenance  
Transportation – Insurance  
Health Insurance  
Life Insurance  
Disability Insurance  
Long-term Care Insurance  
Food – Groceries  
Food – Restaurants  
Kids – Clothing/Toys/School Supplies/Organization Fees  
Kids – Child Care  
Medical Bills  
Personal – Clothing/Hair/Dry Cleaning/Gym  
Car loan  
Credit card debt  
Student loan  
Other loan  
Alimony/Child Support  

The next article in this series is Cracking the Whip on Your Money.

Author Profile

John Davis
John Davis is a nationally recognized expert on credit reporting, credit scoring, and identity theft. He has written four books about his expertise in the field and has been featured extensively in numerous media outlets such as The Wall Street Journal, The Washington Post, CNN, CBS News, CNBC, Fox Business, and many more. With over 20 years of experience helping consumers understand their credit and identity protection rights, John is passionate about empowering people to take control of their finances. He works with financial institutions to develop consumer-friendly policies that promote financial literacy and responsible borrowing habits.

Leave a Comment