Once every few days, I open up a spreadsheet on my computer that I’ve been using for many years. Into that spreadsheet, I type in several lines of information — places where I’ve spent money, how much I spent there, the date I spent that money and what type of expense that was. Once I type those things in, a few automatic calculations occur and I have a nice view of my expenses over the last 30 days, the last year and since I started tracking such information.
It’s a nice little system, one that I’ve customized for my own needs over the years (I was a software developer in a previous stage of my life, so doing this kind of thing is kind of second nature for me), but many of the ideas are borrowed from some commercial software packages.
I consider it one of the most powerful things I do in terms of keeping my spending in check. Why is that the case, though? And how exactly do I do it?
Here are six reasons why you should be tracking your personal expenses.
1. Tracking your expenses helps you to see spending mistakes before they become disastrous personal finance problems.
One of the biggest reasons that people find themselves in financial trouble is due to overspending. People simply get into a routine of spending as much as (or more than) they earn. Because of that, it becomes very difficult to achieve any long-term financial goals and, if any sort of unexpected events occur, it can be disastrous. The truth is that just shy of 80% of U.S. workers live paycheck to paycheck.
While it can be easy to point to one or two big expenses that lead to overspending, it’s often a myriad of little expenses that are the true culprit. It’s easy to pick out that $100 expense, but 10 expenses of $10 each can often go without much notice. It’s only $10, after all, but if that $10 happens again and again, it can add up swiftly.
Tracking your expenses can expose overspending of all sizes, and if you do it diligently, expense tracking can identify when it’s a small issue before it becomes a larger issue where you’re struggling to make ends meet.
2. Expense tracking provides the backbone for a workable and sensible budget.
Many people associate “financial responsibility” with “making a personal budget,” but the truth is that a good workable budget is built on top of an accurate picture of your spending, which you can really only build through tracking your expenses. Everyone has different spending habits and routines, and simply plopping a ready-made budget on top of your individual habits will almost always result in disaster.
Rather, a good budget starts by taking a deep look at how you’ve been spending your money, sorting that spending into sensible categories, and setting some modest goals for some of the more flexible categories.
For example, if you spend $200 on your hobbies each month, $150 is a sensible amount to budget for that category, but you don’t know how much you’re really spending — and thus how much to budget — without tracking your expenses along the way. Knowing your actual spending lets you make realistic budget numbers that can really help you make positive financial progress.
3. Tracking your expenses helps make you more mindful of spending in the moment.
Once you get into the habit of tracking your expenses, you’ll find that the process makes you more mindful of the spending choices you make throughout the day. You’ll begin to associate things like, say, that $5 stop at the coffee shop with the impact it has on your total spending at the end of the month, and that will motivate you to find a cheaper solution or to cut back on a habit that really adds up.
It’s simple repetition, really. The more times you look at and think about a particular type of expense and the big impact it’s having on you, the more likely you are to think of that expense with a more critical eye.
This doesn’t mean that tracking expenses will cause you to never spend money on anything fun ever again. Rather, it will simply make you more mindful of those expenses. There might be times where you recognize you’re not getting a whole lot of value out of a treat, but at other times, it’s something that’s really worth your while.
4. It can improve your relationship with your partner.
Money is one of the most common sources of disputes between couples, and it often boils down to spending habits. If one partner spends more on non-essentials than the other partner, it can easily lead to friction, particularly when that non-essential spending is causing other financial problems.
Tracking your expenses is a very powerful way to not only get a clearer view of your own spending blind spots, but it can also provide useful information in money conversations. A simple record of where the money went can reduce a “he said/she said” dynamic down to actual numbers.
While it can’t solve all financial disputes, it can go a long way toward helping both partners identify spending problems without resorting to accusations and anger.
5. Tracking your expenses can kill financial stress.
One of the biggest sources of financial stress for most people is the eternal question of where all of the money went. A paycheck comes in and it seems like you’re flush with cash, but a few days pass and the account seems practically empty. What happened? Tracking your expenses answers that question.
Tracking all of your expenses means you know where every dime of your money is going, and that changes the question from a stressful mystery to something clear and understandable. Rather than feeling like everything is out of control, it transforms the question into one of personal decision-making, something that’s far less stressful.
In short, tracking your expenses returns the sense of control over your finances to you. You’re no longer just along for the ride on a financial roller coaster.
6. It makes it much easier to set financial goals.
A final advantage of tracking your expenses is that doing so makes it much easier to set financial goals for yourself.
You can easily set specific spending targets for yourself, such as capping your spending on a particular hobby to $50 a month. This is basically akin to budgeting, which is really just a form of financial goal setting.
However, the real advantage of setting spending goals like that is that completing those goals frees up money for bigger financial goals in life. If you are able to trim $200 a month from your spending across several categories, then you have $200 each month with which to get yourself caught up on your bills, get out of overdraft cycles, establish an emergency fund and start paying down high-interest debt.
It’s all about tracking your finances.
Getting started with tracking your expenses is quite easy.
The most straightforward way to get started is to simply write down all of your expenses in a notebook. All you need is a cheap spiral notebook and a pen.
When I first started tracking my own spending, I did it with a simple pocket notebook and a pen. Whenever I spent money on anything, I either jotted it down in that notebook immediately or I stuffed a receipt in the pages of the notebook.
I noticed several things quite quickly. The big one was that I didn’t like writing stuff down in the notebook, not because it took effort, but because doing so meant I had spent money on something and I would have to reckon with that spending later. With a lot of frivolous expenses, I didn’t want to have to reckon with it later because I knew, on a deep level, it was a bad decision.
What does that look like for you? Whenever you spend money, save that receipt, and once every day or two, write down every single item that you spent money on — the date, the item and the amount. You can (and should) also give it a category. You might find it easy to just use categories like “food,” but I take it a bit further and use categories like “basic food,” “eating out,” and “gourmet food” to differentiate between needs and different kinds of wants.
When I’m recording expenses, I go through grocery lists and group all of the items into “basic food,” “gourmet food,” (meaning food at the store that had a cheaper alternative) and “household supplies” by using a highlighter. I do the same for all multi-item receipts. Then, I just add a new item entitled “Food at grocery store” with the category “basic food” and the total, then another item entitled “Food at grocery store” with the category “gourmet food,” then another item entitled “Supplies at grocery store” with the category “household supplies,” and each one has the total cost of the items of that type from the receipt.
There really isn’t a good list of categories with which to sort your spending. Just come up with ones that make sense to you. You might want to just start writing them down now and leave a space for categories, then when you have a few dozen entries, come up with categories and categorize the expenses then.
I find that there is a lot of value in doing this by hand. It really helps me keep in touch with my spending in a way that just typing data into digital tools doesn’t achieve, and I find tools that automatically fill in the data to be even less impactful for me. They’re still useful, but writing it down just hits home in a deeper way.
Speaking of automated tools, there are three tools that I recommend depending on how you want to approach things. I personally do not use any of these regularly (though I’ve tried them all), mostly because I feel uncomfortable using third party tools to directly access my financial accounts, but that’s not because they’re actually insecure in any way. I just choose to minimize the number of online accounts I have that have any access to personal data.
The easiest one to use — but the one that feels the most hands-off and least helpful overall to me — is Mint, which automatically retrieves data for you from your accounts and displays it in an app. It’s free and really easy to use, but I find that it spends too much time offering me suggestions (and ads) that are irrelevant to what I want to see.
A much better option is a subscription service called You Need a Budget, which I consider the best all-around automated budgeting and expense tracking tool out there. It also retrieves data for you, but you can enter a lot of information yourself to supplement that, and it offers a lot of genuinely useful views of your data.
If you’re kind of a spreadsheet wonk, I’d like to give a nod to Tiller Money, which integrates with Google Sheets to automatically pull data from your accounts into a spreadsheet.
Once you have a month or two of data, you can start making some powerful decisions.
The actual process of recording your expenses is a powerful thing. It serves as a strong constant reminder of where your money is actually going, something that can shape your thinking as you’re recording it.
When you start to accumulate a lot of spending data, however, it becomes even more powerful. The collected data enables you to take a step back and look at your broader spending patterns.
With a month’s worth of data from tracking your spending, you can easily ask questions like, “How much money did I spend last month at coffee shops?” or “How much money did I spend last month eating out?” or “How much money did I spend last month on entertainment purchases?” The answers to those questions — and many like them, depending on the categories you’ve chosen — can really shape your thinking when it comes to spending choices.
The realization that you’re spending hundreds a month at coffee shops, $1,000 in the last month eating out at mediocre restaurants or $350 on hobbies can be a real eye-opener. Not only does it show you where your money is actually going, it can help you to realize that your money is going towards things that aren’t providing a lot of value in your life for the amount you’re spending.
When you add up your spending in each category for the month, what you’re doing is creating the backbone of a budget. You can go through all of those categories, figure out which ones are reasonable and which ones are ones where you’re overspending and can cut back, and then use those actual numbers to create a basic budget for yourself.
This whole process reveals a deep truth about budgeting. The real value of budgeting isn’t in creating neat charts and tables, but in the fact that it can identify a few of your worst spending areas and help you get better control over them. It’s not in a chart, but in how that chart changes your behavior.
For most people, a budget is going to reveal some areas of overspending on non-essential items, which you can cut back on by choice, as well as some areas of essential spending that you’d like to cut back on (like trimming bills). While earning more money is always a great solution to this problem, it’s not an immediate solution; thus, the immediate tool at hand is frugality.
One good way to start is by trimming your required monthly bills. Here are 40 tactics for trimming your ordinary monthly bills, as well as some common bills that people can delete entirely. Ask yourself whether each bill you have is necessary and, if it is, ask yourself how you can cut that bill back a little. A good first step is to simply call that company and see what can be done to make that bill smaller.
The other approach is to cut back on your non-essential spending. It’s worth noting that I think it’s a bad idea to cut non-essential spending to the bone. If you trim out all of the stuff you enjoy, you’re going to quickly resent the changes. Rather, you should try to identify the 20% (or so) of your non-essential spending that’s least important to you and cut those things, while being mindful of what you’re gaining as a result of those cuts. If you spend $400 a month eating out, see if you can trim that to $300 by cutting out the $100 spent on the most forgettable meals. If you have some expense you just don’t want to cut, look for some other expense you can cut back on a little harder.
Tracking your personal expenses takes a bit of time, but it’s a powerful nudge toward smarter spending and better financial choices.
Tracking my spending was one of the best things I started doing during my financial turnaround. It gave me a little constant nudge to avoid spending money on frivolous things and soon revealed some of my worst spending habits. Understanding the areas in my life where I was overspending — and simply knowing where all of the money was going – was a transformative change in my financial life.
Get started today. I recommend doing it by hand at first, simply because of how powerful that act is in terms of getting you to notice your expenses. After you build up some entries, start looking at the patterns and see what they’re telling you about sensible changes you can make to your spending. It does take a bit of time, but it can have an enormous impact on your use of money.