Spending habits can be deeply ingrained and hard to break — they’re called habits because they’re regular behaviors you might not consciously think about.

Spending habits don’t always align with affordability, either. Talking yourself out of buying something that you feel emotionally tied to feels like a punishment, and to avoid feeling that way, many are willing to go into debt just to maintain the lifestyle they’re used to.

Having more than just one or two bad spending habits can easily cause your debt to spiral out of control. If your goal is to avoid debt, identifying your spending habits is a necessary first step toward financial freedom.

Here is a four-step process to help you identify where you might be spending too much money (without making you feel bad!) and make positive changes.

Track your expenses

Tracking expenses for a predetermined period of time, like a month, can help give you an honest picture of your overall spending.

While tracking, don’t do anything differently. Just go about your days as you normally would, spending what you normally spend money on. Mint is a good website to use for tracking and categorizing expenses.

Because using cash is difficult to track, make sure to use plastic during this time so that you have an immediate record of every purchase. If you must use cash, you will have to find a way to record your expenses manually, like in a spreadsheet.

Examine your expenses

When your tracking period is over, it’s time to reflect. Look through your transactions, and take mental notes on things that stand out to you.

  • Do you tend to eat at restaurants often?
  • Are you buying coffee and a muffin every morning on your way to work?
  • Do you make a lot of impulse purchases?
  • Did you accumulate debt that you were unable to pay off at the end of the month?

Keep in mind that you’re not beating yourself up here. This phase is for observing and noticing — not judging. Try to disengage emotionally from money, as this skill will come in handy later when you’re ready to start making changes!

Organize your expenses

Once you’ve looked objectively at your spending, you’re now ready to start organizing and categorizing your expenses. Categories differ by individual, of course, but common ones include rent, utilities, food, clothing, and entertainment.

Use a spreadsheet, like Excel or Google Sheets, for this task. If you’re not sure how to use Excel, a basic tutorial can help get you started. Excel and Google Sheets are very similar, so if you learn one, you can easily transition to the other.

When you’re finished with last month’s spreadsheet, copy it and create a template for next month. Now it’s time to make a budget for a brand new month.

Examine your spreadsheet

Look at last month’s spreadsheet and see where you can make cuts for next month. Some expenses, like rent and utilities, are fixed, so you can’t really play with those much.

But many other expenses are fluid and potentially on the chopping block. If restaurant spending is high, for example, and you think you can make a cut in that area, reduce next month’s restaurant budget by a reasonable amount.

If you keep doing this monthly, cutting spending where it makes sense, before you know it, you’ll be back in control.

Steps in a nutshell:

  1. Track expenses for one month and categorize them.
  2. Total all debt accumulated from that month (no judgment!).
  3. Create a new budget for next month. Use your debt total from last month to determine how much to cut from extraneous expenses this month.

The bottom line

After trying these steps, see if you can finish up next month without accumulating any more debt. If you can’t, don’t worry. Just try again.

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