Financial advisors see it all the time: Clients want to develop a savings and investing strategy, yet don’t understand the spending habits that influence their ability to make a financial plan. Just as humans must learn to crawl before they can walk, investors need to see where their money goes before financial planning can start – deciding just how much can be harnessed for retirement, emergencies, or special savings goals.      

There are dozens of tools and data sources that adults can use to track their spending. Whether you choose to use pen and paper or a technology platform that pulls data from all your banking and retirement accounts, when it comes to budgeting the bottom line is that the tools you use are less important than performing the exercise—and doing it at least once annually.      

“Budgeting tools and techniques are like dieting,” says Diane Bourdo, a certified financial planner with Humphreys Group in San Francisco. “The best budgeting tool is the one you’ll actually use.”  

So just what is a budget? It’s a tally of your sources of monthly income, and then a tally of all the expenses taken against that income. Here’s an example of what a household budget might contain.

Use free reports from banks, credit unions, and credit card companies

Budgeting may be time-consuming, but at least it’s inexpensive. Most banks and credit unions now offer free budgeting tools or “spend analyzers” to help customers understand where their money is going on a monthly, quarterly, or annual basis. Credit card providers also generally offer year-end spending categorization reports, designed mainly to help people with tax preparation but also helpful to compare from one year to the next.      

The most important thing consumers need to do when creating their budget is to make sure they’re including all their expenses and data from all of their accounts and credit cards in their math, notes John Flavin, a financial advisor with Synergy Financial Management in Seattle. If you only run the numbers on your bank account and two of four credit cards, or you’ve forgotten about the 12-month special financing you did at a big box store to purchase a major appliance, or you’re not tallying utilities alongside your housing spending, you’re not tallying a complete picture.

Not sure where to get started with your financial planning?
Let GuideVine.com help Find the Right Advisor for you!

Consider using an app that consolidates all your information

Aside from account-specific tools from bankers and card companies, there are many apps and tools that aggregate all of your financial information in a single spot. While these services can take time to set up and linking all your accounts beneath a single umbrella can be cumbersome, these sites can be extremely helpful in creating a complete snapshot of spending patterns.

Sites including Mint, Budget Simple, and MoneyStrands are among services that function this way.      

“We generally recommend that clients work with Mint,” says Ms. Bourdo. “You can see what’s happening in real-time, and you can set up spending alerts if you exceed spending in a certain category.”      

“We don’t have a preference for one service or technique over another,” Mr. Flavin says. “It’s not which program you use, but accuracy that counts.”               

Take action with the results

Advisors recommend that those new to budgeting focus first on collecting good data and do so on a regular basis. Later, they can turn to analysis and decision-making about changes based on the findings—a process they can do with their advisor’s help.

“Generally speaking, people spend more than they think they do,” Ms. Bourdo says. “But awareness is curative. Change is easy once you see what’s going on.”

If you’re paid regularly and have automated most of your spending (auto-deductions for regular expenses) and saving (auto-deductions for savings and investment), it’s easy to avoid budgeting as long as your checking account winds up in the black each month. But budgeting can reveal surprises: Surprise expenses, a shift in income, or a series of subtle price increases—increases in property taxes, insurance premiums, subscription-based services (gym, newspaper) or a new toll on the work commute—can combine to bite a big chunk out of a paycheck.

Budget regularly

Financial advisors recommend that clients pay attention to their budgets on a regular basis—and do a deep dive to look at where their money is going at least once annually.      

The other purpose of budgeting is to help investors understand how much money they truly need to lead their current lifestyle—and to set expectations about how much it will take to fund the future lifestyle they want to lead during retirement. Budgeting, in other words, is a pre-cursor to long-term financial planning.

“It sounds counterintuitive, but what you save doesn’t matter as much as what you spend,” says Mr. Flavin. “If you’re not saving enough to cover your spending, then your plan won’t work.”

Not sure where to start your search for a financial advisor?
Book a Free Appointment with a GuideVine Concierge Today

Jane Hodges

Jane Hodges

Jane Hodges is the author of Rent Vs. Own (Chronicle Books) and has written about real estate and personal finance for The Wall Street Journal, New York Times, Seattle Times, Fortune and many other publications. Follow Jane on Twitter and Google+