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One of the best things you can do for yourself when starting a budget is to track your spending.
It is extremely important to know where your money is going in order for you to make an effective plan.
Think about it.
If you try to cut your spending without knowing what you typically spend, how will that work when you undercut the expenses? It won’t be beneficial to you if you just
40% of Americans are still living paycheck to paycheck and struggling to put food on the table despite making a decent income. Most attribute their poor financial habits to the lifestyle creep. Earning more, spend more was the mindset. That couldn’t be farther from the truth.
This was me 4 years ago. I was living paycheck to paycheck, no
This is why it is so vital to begin tracking your spending. You need to know where your money is going.
Important Reasons to Track Your Spending
Before we go into how to track your spending, first I’m going to illustrate the main reasons why you need to be tracking your expenses. It’s important to understand why you are doing something in order for you to “agree” in your mind that it’s a good idea.
1. It Provides a Wake Up Call
Do you actually know how much you are spending on Amazon? Yeah, thought so.
I remember when I first started to budget, I sat down and took a look at all my statements and realized that I was spending an absurd amount on Amazon and eating out. I was shocked.
Have you ever seen those videos where coworkers or friends swap bank statements and analyze their friends’ spending? Super funny, check it out below.
This can be a huge
2. Your Spending Tracker is Specifically Designed For You
If you try to compare your expenses to a family of 3 living in an apartment when you are a family of 6 with 2 kids in school and a mortgage living in the suburbs, you will be sadly mistaken if you think you will have the same expenses.
Every time I see the question asked in a large money
Tracking your own spending allows you to make adjustments based on YOUR spending habits, not someone else’s.
3. Tracking Your Expenses Provides a Sense of Awareness
As you write in your expense log, it makes you very aware of where you are spending your money.
Generating awareness in your finances now will lead to the creation of a master plan for your future.Simple Money Mom
If you didn’t know that you were spending $400 each month in dining and restaurants, how would you know that is where you need to save money? If you did know that you spent “too much”, how would you know exactly how much to cut back?
You may think to yourself, “Yeah, I probably spend too much on clothes or makeup” but do you actually know how much you spend?
Generating this financial awareness by tracking every single dollar you spend is pivotal to your budgeting success.
4. It Can Help You Stick to Your Budget
Each purchase you make adds up. $5 here, $8.50 there, and $21.00 there starts to put a significant dent in your budget if you aren’t careful.
When you catch on that you are spending more than you budgeted for, you can stop spending in that category. Don’t give up on that budget just because you already went over. Instead, make a conscious effort to stay on budget until it’s time to create a new one.
It’s all about your mindset. How bad do you want to get out of debt? Save for your new house? Save for your new baby? Retire early? Use that as your WHY to keep going.
5. Tracking Your Spending Makes You Aware of Questionable Charges
Notice another charge in your account? Not sure where it’s from? Chances are, it may be fraudulent.
Fraudulent charges are real. It has happened to me twice. How did I catch it? I monitored my account and I tracked my spending.
It began with me noticing a $2.25 charge for Redbox. I thought that was weird. I didn’t remember using Redbox that month. But, since the amount was so low, I left it.
A month later, I noticed another charge from Redbox. This time, it was for $35. I know that I did not use Redbox at all that month. I asked my husband if he used my card to check out a movie and never returned it? He said no. So, I called my bank and Redbox to find the problem. It turns out, the initial fee was for a late return, the second was for a no return. Well, this Redbox that I “purchased” from was 100 miles away. It was obviously not me.
I was able to dispute the charges and get my money back on both transactions but the annoyance of having to close my card and wait for a new one wasn’t ideal. Not to mention, having to switch all of my accounts that were linked to my debit card.
If I didn’t pay attention to my statements or if I didn’t track my spending, that amount could have been much higher over time and I probably would have only caught on when I didn’t have any money in the bank.
6. When Keeping Up with Your Expense Tracker, You Can Catch Forgotten Expenses
Ever wonder where that $20 went? You swore it was in your purse just the other day. It happened to me all the time whenever I forget to track my expenses. It happened more when I used the cash envelope method as I forgot A LOT. If I didn’t write it down, it didn’t happen.
As long as you write down every transaction, you won’t be blindsided when you discover there is $20 less in your account.
We’ve looked at “why” you need to track your spending, now let’s look at “how” to track it.
How to Effectively Track Your Spending
When starting out, you can do one of two things: either grab your bank and credit card statements from the last 3 months to see where your money is going or start tracking your expenses from scratch.
You’ll need to get an idea of where to cut back in order for your budget plan to be successful.
Step 1: Gather EVERY mode of payment: this includes
Tip: consolidate your mode of payment. It will be too complicated to try to keep track of 2 credit cards, a debit card, an ATM card, and PayPal. Instead, limit yourself to using only 2-3 sources.
Step 2: As soon as you make a purchase or as soon as your bill goes through, write it down. It’s going to be very important for you to document every expense as it happens (or even at the end of the day) in order for you to effectively track your expenses in an organized manner.
Step 3: Categorize your expenses. I suggest using these highlighters or these markers to visualize your spending at a glance. You can quickly see if you are spending too much in one category if you color
Tip: keep your categories simple. If you begin adding too many categories, it will become too complicated. If possible, keep your categories below 10.
Step 4: Add up the total amount spent for the month. This will be called your Lifestyle Nut. How much money are you spending to live your current lifestyle? Are you living a $5,000/mo lifestyle when you can’t afford it? Can you live off of $3,000 per month for a family of 5?
Step 5: At the end of the month, examine your spending habits and determine how much of your paycheck is going to each category. If you notice that you are spending too much in one particular area, then make it a goal to decrease it for the next paycheck.
Tracking Your Expenses with Pen and Paper
When you write down what you spend every day, you are forced to look at the numbers. They become more “real”. At that point, you need to begin to analyze and scrutinize your spending as it happens so that you can see which area can be cut down.
Back when I was extremely intent on getting out of debt, I used an old fashioned checkbook ledger to track my expenses. I have to say that it was one of the most effective ways that I was able to track my money.
When you are first starting out, I highly recommend using a printable expense tracker. Once you get the hang of it, you can begin tracking digitally if you’d like.
Digitally Tracking Your Expenses
In an era where everything is digital and everyone has a smart phone, it comes to no surprise that people are using their phones to track their spending.
Apps like Mint, Every Dollar, YNAB, and Personal Capital are becoming increasingly popular with managing your money and creating budgets.
The thing I like about these apps is that it provides convenience. You aren’t forced to bring a paper and pen with you everywhere you go and you aren’t forced to hoard your receipts for later. They also categorize your budget for you and places nice little charts and graphs of your money, making it visually effective.
However, digitally tracking your expenses can have it’s downsides.
First, they may not update to the day. If you want to create a plan for the next paycheck but your app hasn’t uploaded all of the expenses from its connected account yet, then it could cause a delay in creating your next budget.
Second, your categories can be off. Depending on the details of your expenses, your app may categorize your mortgage payment for a “miscellaneous” expense. Or, it may calculate your gas as “grocery expense”. So then, you’ll have to go in and manually fix the category.
So when you first start out, I recommend starting with paper and pen. I’ve created the new Monthly Expense Tracker to help you.
The Biggest Mistake I Made
In complete transparency, I’m going to share a big mistake I made. Once I became debt free, I stopped tracking my spending.
DO NOT DO THIS.
You see, after a while, I began to start making impulse purchases again. In my mind, I deserved to be able to treat myself now that I accomplished financial freedom. I now had all of this money so why should I continue to squirrel it away?
I mean, I was still saving but not as much as I had been putting towards debt.
Well, this is what happened.
Week after week, paycheck after paycheck, I began noticing that the amount I had left to put into savings became lower and lower. I was supposed to be able to save $1,100+ each month so why was I only left with $400 to put towards savings?
I stopped tracking my spending. That was why.
I ate out A LOT again. Fast-food, restaurants, you name it. I became lazy and it showed in my finances. Luckily, I was able to catch it when I peeked at my statements for the month as I normally do. Unfortunately, I caught it after the fact that I had already spent it. Had I been tracking my spending like before, I would have noticed it.
Biggest Takeaways for Tracking Your Expenses
- Start NOW
- Tracking your expenses makes you fully aware of your spending habits
- Use a pen and paper to start out, then you can move on to digital apps
- Don’t stop tracking, lest you end up back in debt