When Stephen and I first started trying to manage our finances, we used three basic tools. One was to create a Budget. We had never used one before. In fact, I had never seen one. It took a few months of tweaking to get one that worked for us, but we got there. Click here for my article on how to put a budget together. Included in the Budget article is a Budgeting Spreadsheet.
The second was to use Envelopes. That’s right – I actually had white envelopes with cash in them in my purse. I would use envelopes for some of the categories in our budget, like groceries. It was an easy way to see how much I’d spent and what was left.
The third tool was to Track Our Spending. That process was scary! I was afraid to see where our money was going, and it seemed so tedious! But tracking our spending turned out to be a great tool for us. In fact, I still track every penny I spend. Why? We have transitioned from the accumulation phase to the drawdown phase where we are living off our investments. Tracking our spending kept everything in focus while we were saving and now it helps us not overspend. I’m hoping to graduate from tracking every penny, but it gives me a level of comfort I like. Maybe after we have a year or two of history with our retirement spending I will feel comfortable to not track it all.
If numbers and spreadsheets make your head spin, you’re probably cringing at the thought of tracking your spending. But instead of focusing on the how, let’s talk about the why. If you’re willing to recognize the benefits of tracking your spending, you’re more likely to do it. Here are six benefits of tracking your spending to get you motivated to start.
6 Benefits of Tracking Your Spending
(1) Helps You Make a Better Budget
In order to create a meaningful budget, you need to understand where your money goes. You probably know how much your rent or mortgage is. It’s a budget category that shouldn’t fluctuate too much. But how about your grocery bill? How about car repairs?
Many areas of your budget will fluctuate weekly, monthly or seasonally. If you only look at your last grocery receipt, you might overlook the fact you purchased extra food because of house guests or that you bought less because you were on a business trip. Depending on where you live, your utility bills may fluctuate wildly from season to season.
It’s important to track your spending over time in order to build a better budget. And when you build a better budget, you’re more likely to stick to it.
(2) Combats Mindless Spending
From what I have observed and experienced, impulse spending is the enemy of wealth. You’ve probably heard the story where someone making six figures a year is broke. How does that even happen? It’s because they spent, spent, spent and never had a plan for where the money was really needed.
That’s why having a budget is so important, but it’s not enough. If you’re spending way off plan, you’ll find yourself in the hole every month. On the other hand, if you track your spending, you might uncover a few shocking numbers.
Did you think you were spending $100 a week on groceries only to realize the figure was more like $300? Did you assume you spent $500 a year on clothes, only to see that you spent that amount each month? Or maybe you mindlessly spend money at the vending machines at work. That might not seem like a problem until you tally up the expense and realize what else you could have done with the money.
As you compare your spending to your budget, you might realize some areas need to be trimmed. You might also decide the excess money you’re spending is better off going toward debt or savings.
Tracking your spending puts your expenses in black and white. There’s no denying your problem areas anymore. Knowing is half the battle.
(3) Helps Get Your Spouse On Board
Finances are one of the biggest causes of stress and tension in long-term relationships. That’s more likely to be the case when neither party has any idea what the other party is doing with their money.
The very act of tracking spending together as a couple makes it more likely that you’ll coordinate with your spouse ahead of purchases. You can check to make sure all your expenditures align with the priorities you have as a team.
I can’t stress enough how important it is to be on the same page with your spouse financially. When you’re not, it’s like being in the same boat, but rowing in opposite directions. You’re together, but you spend a lot of energy and go nowhere. Click here for my article on Being on the Same Page With Your Spouse.
(4) Catches Expenses You Forgot About
When you’re tracking your spending, go through your bank accounts and make sure you capture everything. Many people will find there are a few charges they forgot about (umm, iTunes anyone?) These charges are often subscriptions you signed up for a long time ago, and you might not have used the service in years.
People are especially prone to signing up for a “free” service that’s actually only free for a few months. Then it begins to charge you. You probably told yourself you would cancel the subscription before the charges kicked in but then forgot.
As you run through these charges, promptly cancel all subscriptions you no longer need or want. For the remainder of the charges, make sure they find a place in your budget.
(5) Confirms If Your Spending Aligns With Your Values
Are you in debt payoff mode? Are you saving for a house down payment or retirement? We all have some long-term financial goals. The ultimate goal of your budget is to make those long-term goals happen. However, your spending puts the pedal to the metal. Your budget means nothing unless you abide by it.
Let’s say you’re in debt payoff mode and you’ve budgeted $300 a month for it. However, each month you find you’re short of making that happen because you spent too much on entertainment or eating out. Tracking your spending allows you to start questioning yourself. Are these expenses really in line with your priorities?
One special note here: you are allowed to change your priorities. Debt payoff might be your priority today, but tomorrow it could be different. Make sure you know what your top priorities are by reviewing them monthly. Don’t allow your spending to control them. (This is what we did for years!)
(6) Simplifies Your Life
Let’s say you decide to track your spending. You pull together all your receipts. You arm yourself with a glass of wine to tackle the mountain of receipts before you.
The first month, you have 75 receipts to examine, plus additional charges in your bank statement you had forgotten about (oops). You stopped in the grocery store more than once each week. You had three different Amazon orders. You paid daycare each week. You got gas several times – not because you had to, but because you didn’t really plan your trips well.
As you move forward, you might find you want to simplify your life. You might force yourself to plan better for grocery shopping so you don’t have to run back to the store. You might force yourself to wait a few days on Amazon purchases. You might check with daycare to see if you can pay once a month, instead of weekly (and maybe get a discount).
A natural outcome of simplification is experiencing a small amount of savings. Fewer trips to the grocery store means less opportunity for impulse buying. Delaying Amazon purchases might be enough to make you decide against that purchase all together. Some places offer price breaks if you pay in advance (insurance is one notable area that gives breaks like this)(get in the habit of always asking about discounts for paying up front). Combining trips means savings on gas, plus less wear and tear of your vehicle.
The first few weeks of tracking your spending will be the hardest, but have no fear! It will get easier, and the benefits of tracking your spending will outweigh any negatives. The sooner you get started, the sooner you’ll experience these benefits.
Methods For Keeping Track of Expenses
Tracking spending can be done manually by writing down every purchase you make. Or you can use apps such as Mint or YNAB that link to your credit cards and bank accounts to make the process easier. Whatever approach you choose, it may seem like a hassle – but it’s well worth it in the end. The best approach is one that you feel comfortable enough to stick with every day.
(1) Record Expenses With Pen and Paper
If you prefer a tech-free solution for tracking your expenses, write down every penny that you spend and where you spent it in a notebook. Consider reserving a page for each spending category in your budget, or use one page and simply note the category next to each expenditure. This no-frills approach can tell you at a glance where your money is going. Although it may be more difficult to identify spending trends on paper, this method at least makes you more aware of your spending.
(2) Make It Easier With an App or Software
A more modern and convenient way to track your expenses is in a spreadsheet or an app. Online apps may even offer colorful graphs and charts to illustrate your spending habits, but both options allow you to quickly and easily enter your purchases in a spending category on the same day that you incur them.
I have created a very basic spreadsheet for expense tracking. You can get a copy for yourself by clicking the link below. (As with all my spreadsheets, be sure you save a copy for yourself before making any changes.) The first tab is the instructions, the second is a sample month and the fillable template for each month is in the following tabs.
Work Together as a Couple
If you are married, you will both need to track your expenses. If you choose an app, you can sync your spending with your spouse’s so that you don’t blow your budget. If you use a spreadsheet, make sure each of you logs their expenses for the day.
Keep Going Even When You Overspend
If you discover that you overspent in a few categories, don’t just stop and wait for next month. It’s important to continue to track your expenses throughout the month so that you can identify what you need to change and by how much.
This activity shouldn’t take more than a few minutes each day if you adopt an expense tracking approach that works for you. If you consistently track your expenses, you will be able to save more, spend less, and make necessary changes to your finances that will allow you to build wealth.
Assignment 1 – Select a method for tracking your expenses. Pencil/Paper, Spreadsheet or App. If you don’t like your choice after a month or 2, pick a different method.
Assignment 2 – Start at the beginning of the next month and start tracking you expenses. I know this may feel time consuming or useless, but DON’T GIVE UP!
Key Takeaway – Tracking your spending will help you/spouse get a handle on where your money is going so you can be in control of your future and not let it “just happen to you.”
Coming Soon – In my next post we will tackle DEBT. How does it affect you and your financial stability and strategies for paying it off.