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2021 money challenge: How to evaluate your spending so you know where your money is going

CNBC Select spoke with Michelle Brownstein, CFP about the second step you should take in our seven-day 2021 money challenge.

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To ring in the New Year, CNBC Select is posting a new money challenge each day for the first week of 2021. Think of these tasks as your financial deep clean, based on expert advice, to help you align your money choices with what you care about most. These are simple tasks, but they do require a commitment. Are you in?

This is day two of seven.

Time to figure out where your money goes throughout the year. You might be surprised by what you find, or think to yourself, "Yep, that's about right."

Day Two: Where is my money going?

After you calculate your net worth, it's time to look at how you spend your money.

To get the most accurate snapshot, pull the past 12 months worth of credit card statements and/or checking/savings account statements. Some banks and card issuers may let you download a yearly review of all your transactions organized into charts and graphs so you can get a clear look at your total annual spending.

You might already have an idea of what you spend your money on each month, says Personal Capital expert Michelle Brownstein, CFP.

"Most of the time, if you ask someone, they can rattle off the big expenses pretty quickly," she tells CNBC Select.

Those big expenses include:

  1. Housing
  2. Transportation or car payments
  3. Food

Additionally, you might know how much your cable or cell phone bills are per month, as well as other costs like insurance or your gym membership.

However, it's easy to lose sight of how one-off purchases can impact your overall yearly spend. Reviewing all of your transactions can show you how much you really spent on coffee, Amazon purchases, happy hour drinks or grabbing takeout for lunch.

Looking at your entire year-in-review also helps you notice patterns in your spending, like when there are upticks around vacations, holidays, birthdays and other annual events.

"Make sure you think about the one-off expenses that happen every year," Brownstein advises. Tax time is happens every year, yet it still might catch you off guard. But reviewing your 2020 expenses can help you prepare for what's to come this spring.

Once you understand how you spent your money last year, you'll be better equipped to set goals for the future.

Use your 2020 data to set a realistic budget for the year ahead, taking into account one or two areas where you'd like to adjust according to your priorities.

For instance, if you want to grow more savings in 2021, see if you can make small cut backs in spending categories that aren't as important to you. You could cancel an unused (or rarely used) subscription service or eliminate one takeout meal per week from your routine so that you can divert that money toward your future wants and needs.

An easy way to think about your budget is to categorize your expenses according to three simple tiers:

  • Must-haves (recurring monthly expenses you can't live without like rent/mortgage, insurance, transportation, food, etc.)
  • Nice-to-haves (discretionary expenses that might change from month to month)
  • Annual expenses (taxes, annual trips, holiday spending)

Figure out what your baseline budget is by adding up your monthly "must-haves," then see what's leftover for the discretionary "nice-to-have" costs you could live without if you had to.

Don't forget to include saving as a line-item in your budget, as it's important to prepare for future needs.

Opening a savings account is an important first step to take in your financial journey. Savings accounts make great emergency funds, but they can also be a crucial tool to help you achieve short- and long-term goals, like buying a car or a house or saving up for a big trip.

Check out the best savings accounts of 2021

CNBC Select ranked the best savings products of 2021: We found Marcus by Goldman Sachs High Yield Online Savings to be the best high-yield savings account and Ally Bank Online Savings Account to be the best online savings/checking combo. Prefer to bank at a physical branch? Consider the Capital One 360 Performance Savings™.

If you have a longer-term goal on the horizon, CDs offer a safe way to store your cash while earning interest. The First National Bank of America CD is our favorite three-year CD and for five-year goals check out the Ally Bank High Yield CD.

This is day two in CNBC Select's 7 Day Money Challenge.

Day 1: Calculating this simple number is the first step to getting your finances on track for 2021

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.