If you’re just getting into the personal finance sphere, you may have been given the advice to start budgeting. And depending on your financial history, that might sound kind of scary. However, there’s a big first step that you should take on before cracking into budgeting- track your spending!
This is super important cornerstone of personal finance, especially if you’re trying to build wealth on a small income. Understanding where your money comes and goes puts you in a better position for making bigger money decisions.
Why You Need to Track Your Spending:
Anyone can slap some numbers onto a spreadsheet and call it a budget. However, in order to *stick* to a budget, we need the numbers to be realistic.
For example, if you only budget $20 for food each month, chances are you’re going to be over budget in that category every single month unless you can subsist on small amounts of rice and beans each day. Sounds kinda bland, right!? And nothing is more discouraging than failing to meet your goals time and time again. You want to set yourself up for success, not failure!
Making a budget that is realistic for your specific situation is important in getting those small wins under your belt. But how do we know what’s realistic and what isn’t when budgeting?
In comes tracking your spending! It’s the key to this conundrum. When you track your spending you can fully understand what your fixed expenses are, and how much you tend to spend on nonessentials. It’s also crucial to understanding your savings rate, and if the way you’re spending your money aligns with your goals and values. Data doesn’t lie.
How to Track Your Spending:
Tracking your spending is super easy, and you should be able to tackle it in about an hour or two. Here’s how to successfully track your spending in five simple steps!
Step One: Gather Your Supplies
You need just a few things to get started tracking your expenses. First, you’ll need somewhere to write down your purchases. You can go the old school route with pen and paper, or use software like Excel, Google Sheets or Google Docs. There are also digital apps like Credit Karma, YNAB and Empower that can help automate expense tracking. (here are some other Mint alternatives!)
Next, you’ll need to find records of all of your purchases. If you operate mostly cashless, it should be pretty easy to dig these up. Just open up your credit card or banking apps, or head to those websites and log in to see your purchase history. If you’ve bought things with cash recently, you’ll have to go hunting for physical proof! Make sure to check all your pockets for any elusive receipts that might have turned into a crumpled heap at the bottom of your bag…
Step Two: Categorize Your Purchases
Now that you’ve gathered all of your receipts, it’s time to break all of your purchases down into broader categories. I recommend doing this for the past three months to get a better idea of what your average spending looks like. Averaging a few months together will help you to understand how much you typically spend each month on different types of purchases.
You can also include the amounts you’ve stashed away into your savings account or investment accounts over the past month.
Some categories you might want to consider having are:
- housing
- utilities
- food
- entertainment
- eating out
- personal
- home
- gifts
- health
- savings
- investing
Step 3: Crunch the Numbers
Now that you’ve gathered all of your expenses, it’s time to crunch the numbers on how much you’ve spent in each category month over month. You can even put your kids to work and have them do the math for you! Make sure to also add up the total amount of money spent for each month.
Step 4: Time to Analyze
Now comes the real brain work. It’s time to analyze your totals for each category.
Firstly, let’s take a look at the total money spent. Are you spending more money each month than you’re bringing in? If so, you’ll need to make some cuts in a few areas to make sure that you are not living beyond your means. As a general rule of thumb, you should shoot to save and invest a minimum of 10-20% of your income.
Then, note all your fixed expenses. These are lines in your budget that don’t change from month to month, like your rent, internet, phone bill, gym membership, and loan payments.
Try to also identify a few spending categories where you feel like you’re overspending. For example, if you realize that you’ve spent $1,000 on takeout every month, you may decide that this is a category you think you can pare down in the coming months.
Lastly, make sure to celebrate a few wins! Write down a few spending categories where you really crushed it these past few months. Whether you got your grocery spending down by using a few coupons, or managed to keep your electric bill lower over the summer, it’s important to take some time to acknowledge the things you’ve been doing right.
Step 5: Make that Budget!
Having taken the time to track your spending and analyze trends, you’re now ready to move on to budgeting. With your newly acquired understanding of your spending habits, you’re now prepared to create a budget that is realistic and geared towards your specific money goals.
If you’re new to budgeting, you can try one of these 4 easy approaches to budgeting. Once you’ve decided which method you’re going to use, craft your budget taking your usual spending into account.
Tips for Success:
Tracking your spending doesn’t need to be difficult. Here are a few tips to make it even easier, and maybe (just maybe) even a little enjoyable.
Use an Expense Tracking App
If you don’t have time to track your spending the manual way, you can get an app to do most of the heavy lifting for you. You Need A Budget (YNAB) is our personal favorite, but you can also use a free app like Credit Karma or Empower. These apps track your spending for you and provide you with helpful insights to help you save more money along the way!
Be Honest and Realistic
If tracking your spending makes you realize that you’re eating out way more often than you should be, instead of trying to quit cold turkey, try to pare back your eating out budget by a few days each week.
Setting unrealistic goals for yourself off the bat can be really demotivating. Instead, set yourself up for success by creating SMART goals based on your typical spending.
Get Some Quick Savings
If tracking your spending reveals that you’re spending more money than you’re making, it’s time to take action quickly. Tackle some low hanging fruit to free up money in your budget ASAP.
For example, you can shop around for cheaper insurance, negotiate some of your bills, or tackle one of these 7 ways to save more money this week.
Don’t Be Too Hard on Yourself
It’s easy to get a little down when you track your spending and see that you’ve overspent in the recent past. However, the point of tracking your expenses is not to beat yourself up over the money you spent that could have gone to a better use.
It’s all about using your past to inform the present and future. What’s important is that you’re taking steps now to better handle your money going forward.
The Bottom Line:
Tracking your expenses is an important part of managing your personal finances. It both serves to inform your budget, and to help you understand yourself and your money habits more thoroughly.
That’s why we encourage you to start with this crucial step before taking the plunge into budgeting! You’ll have a better chance of sticking to your budget with more realistic trends to work with.
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