How to find out what's happened to your cash

Where is your money going? How can you set up a budget? Rob Griffin asks the experts

Keeping track of your money is crucial. Unless you know what you have coming in each month and how it's being spent, you will be on the fast track to financial problems. Add in a few missed credit card payments and you will soon have debt issues spiralling out of control.

Learning to budget properly is the answer. It might sound straightforward but understanding how best to allocate your resources, knowing when you have to make minimum repayments and monitoring your bank balance need to be carried out with something akin to military precision.

Thankfully, there's plenty of help at hand. We asked a panel of independent financial advisers and debt counsellors to give us their best tips. We've also taken a look at the new breed of personal finance programs on the market to help you monitor your money.

Step one: Deal with your debts

How much do you owe on credit cards? Do you have any other loans? Have you been suckered into taking out store cards charging punitive interest rates?

Don't bury your head in the sand and ignore debt problems because the earlier you seek advice, the more that specialist charities and agencies can do to help you, points out Una Farrell of the Consumer Credit Counselling Service. She says: "People need to work out how much they owe and divide these into priority and non-priority debts – with priority being a debt for which non-payment could result in them having a utility cut off, losing their home or being sent to jail."

An income and expenditure budget will show you how much money is available to service your debts. If you don't have enough to keep up with monthly payments – or are making only the minimum credit card repayments – get advice from the CCCS, Citizens Advice or National Debtline.

Step two: DRAW UP a budget

List your take-home pay and any other income, then compare it with what you typically spend a month. You might find it helpful to look through bank and credit card statements.

List expenditure you can't avoid, such as mortgage/rent, council tax, car and home insurance, utilities, fuel and food – followed by semi-essentials that you could feasibly live without, such as clothes and retirement planning.

Finally, take into account luxury items such as eating out and your satellite TV subscription, says Justin Modray, founder of the Candid Money website. He advises that you shop around for the best deals even if you can afford everything on all three lists.

"If you're spending more than you would like or can afford, then some disciplined pruning will be required," he adds. "After trimming costs by shopping around, start by cutting back on luxuries and if that's not enough, make cuts on semi-essential items too.

"The main rule is to be realistic as there's no point drawing up a budget that looks great on paper if there's no chance of being able to stick to it."

There are always savings to be made, points out Mel Kenny of the financial adviser Radcliffe & Newlands. "In these times of low interest rates consider annual travel cards," he suggests. "Not only is there the saving from paying up front but you could also get a third off train journeys."

Step three: Organise your short-term savings

Once you have a list of target monthly expenditure, add a contingency fund for unexpected items that crop up from time to time. This can include emergency boiler repairs, getting your car fixed or money for a dentist's bill.

"If possible, try to save at least 5 to 10 per cent of your income, including pension contributions," adds Modray. "If you have a specific purpose for your savings, run a simple projection to see whether you're saving enough."

According to Geoff Penrice, an independent financial adviser with Honister Partners, the best rainy-day emergency funds are flexible, tax-efficient, convenient to use and come with an attractive rate of interest.

"It makes sense to use one's ISA allowance as the interest is tax-free," he says. "You can save up to £5,340 in the current tax year and can get more than 3 per cent from the best ISAs, such as the Nationwide e-ISA." Of course this is still less than inflation, which makes it unsuitable for the longer term, but this is the price you pay for flexibility and convenience.

"If you are willing to tie your funds up for longer, you can get around 4 per cent on a three-year bond and up to 5 per cent on a five-year bond such as BM Savings Bonds from Birmingham & Midshires," he adds.

Step four: Put a longer-term savings plan in place

Patrick Connolly, of AWD Chase de Vere, says the best approach for long-term savings is a combination of pensions and ISAs – particularly stocks and shares ISAs, which may be riskier but offer the potential for better returns. "Pensions provide initial tax relief benefits but are inflexible, whereas ISAs can still be tax-efficient and are extremely flexible," he says. "Check out any employer's scheme and find out whether they will make any contributions."

Step five: Choose the best way to track your money

Once you have your finances sorted out, the challenge is how best to keep on top of them. The best way of doing this is down to personal preference.

Some opt for pen and paper while others prefer to use technology. Spreadsheet packages such as Excel let you carry out complex calculations, making them ideal for tracking in-comings and outgoings.

The next option is specialist personal finance programs that let you see just what is happening to your cash. Some are free to download while others cost around £30.

At their most basic they will enable you to construct monthly budgets and analyse expenditure. Others allow you to import data directly from your bank and share accounts.

It's worth looking at Ace Money Lite if you want a free offering or Bank Tree, Home Accountz or Moneydance if you're willing to spend a bit.

Even the simplest programs require a considerable commitment in time, as you will need to input much of the data – although most allow information stored elsewhere to be uploaded – and then update it regularly.

Then there are account aggregators – websites that let you view all your online accounts from one screen instead of having to visit various sites. But be careful, as you are effectively allowing a third party into your personal banking arrangements.

Consider fees, whether your bank will let you give your passwords to an account aggregator and what protection there is should something major happen, such as a security breach.

Regardless of how you keep on top of your finances, it's a good idea to monitor your spending closely for the first couple of months, then every once in a while to ensure you're sticking to the plan, advises Modray.

"If you want to track things month by month, personal finance software will come into its own, especially if it can import data from your bank account and credit cards," he says. "However, this takes more time than most of us want to spend, so a check every few months should be fine."

The key aspect is to be aware what you're spending and how your finances stand during the month. "If you need any motivation, think how much happier you'll feel avoiding or paying off expensive debts," he adds.