Where Does Your Money Go? Find Out

You really don't know where it all goes, do you?

I'm talking about your money, specifically the paycheck you get every week or two weeks or each month. You deposit it and pretty soon you realize that most of it is gone.

If you're fortunate, by the time you realize most of it is gone, the next one is about to arrive. That means you're just about breaking even. It also means you aren't saving and investing enough.

You need to open what I call a 3x5 savings account.

Don't worry, it isn't hard to do. It just takes a little willpower and a little time. But the rewards can be huge: more money than you probably thought was possible, money that can fund anything up to and including early retirement.

How to Begin

Here's how to do it. Get yourself a pack of 3x5 index cards. Label one of those cards "Week of June 1." Put it in your shirt pocket or purse along with a ballpoint pen. Now, for the whole week, under daily headings, jot down every single cent you spend and what you're spending it on.

Cup of coffee? Write it down. Tank of gasoline? Write it down? New purse? Ditto. Oh, and when you get your next paycheck, write down the take-home amount, too, on your 3x5 card.

At the end of the month you'll have four cards that will provide you with a very detailed record of where your money came from and where it went. It might take 30 minutes to tote it all up, but you'll know if you're exceeding your income, playing it close to the edge, or actually saving money to invest.

Congratulations, you're on your way to financial discipline and all the rewards it can bring.

It probably sounds too simple. After all, there's Quicken and other software to help us track our finances, and our banks and credit-card companies offer us detailed monthly statements. We should have plenty of information about where our money is going if we only take the time to examine it. But, of course, we don't take the time to do that.

And even if we did, those tidy looking statements don't capture a lot of the money we spend in seemingly negligible cash transactions. And it's hard to remember, looking at a credit-card statement, precisely what it was we purchased from Macy's or Amazon.

Firsthand Experience

My wife, Jane, and I started a 3x5 account many years ago when we were shocked and surprised that the profits from a house sale had simply disappeared a year later. I had counted on those profits to form the core of a savings program that would allow us, over the years, to buy a boat and save enough to retire early and go sailing.

We both resolved -- that's important because this plan won't work if everyone isn't playing the game -- to figure out where in the world the money was going. The weekly 3x5 cards were the vehicle to do it.

Much was revealed in the first month alone. Restaurants were a primary villain. We had moved to New York from Detroit and were reveling in the variety and quality of dining opportunities suddenly available. And going broke as a result.

The bad part was that most of the meals hadn't been worth what they cost. Good, yes. Memorable, no. We resolved to indulge our own penchant for cooking more often.

To give you an idea of when all this was happening, compact-disc players had just come on the scene and to a classical-music buff like me the earth had moved. But my ambitious plan to replicate my extensive collection of vinyl records with CDs was another major drain on our resources.

When I realized how much I was spending via my 3x5 cards, I immediately saw the value in continuing to enjoy my vinyl records, buying CDs only when a disc of note was released. I can only imagine the number of 99-cent entries my card would show today were I addicted to an iPod.

The revelations of that first month of 3x5 entries were astounding. The changes we made immediately in our spending habits probably added well over $10,000 to our savings in the first year. And while later gains were incrementally smaller, they nevertheless added up. When we combined periodic raises at work with increasingly detailed efforts to save, the results became very impressive.

Mind you, we kept the exercise simple: take-home pay matched against expenses. We didn't try to include gains (or losses) from investments. The point was to build an investment portfolio out of routine cash flow, not to measure our constantly fluctuating net worth.

Secrets of Success

The 3x5 account turned out to be a great vehicle for saving for several reasons. First, of course, it was invaluable to have a real-time record of all our expenses.

But there was an equally important psychological benefit. Psychologists talk about "buyer's remorse," the feeling you get when a new purchase doesn't really turn out to be as fulfilling as you had thought. By committing ourselves to record every purchase at the time we made it, Jane and I often experienced buyer's remorse before we actually bought something.

Do I really need this? More often than not, we answered no and put the item back on the shelf.

Because we had ambitious plans for the future we stuck to our 3x5 accounts for years until we reached our goals. But in reality it only took a year or two to build the discipline that allowed us to control our spending and save and invest conscientiously.

Try it. It you stick with it for a while, a 3x5 account will work for you, too.

Mr. Sease, a former reporter and editor of The Wall Street Journal, is a free-lance writer living in Vero Beach, Fla.