At 22 years old, I was making $55K per year and I was the envy of all my friends. But I was still broke and I couldn’t figure out why. For months, I was unhappy about my job partly because I wasn't enjoying the money I was making. Then, it dawned on me – the money’s going somewhere, I just had to figure out where it was going.
So I started tracking my spending. I was shocked at what I found out. My rent was close to one-third of my net income. My next big spenders were groceries and gas (I lived 3.5 miles from work). Equipped with that knowledge, I put a plan into action that left me with an extra $550 each month. That extra money felt like a raise, but really, I was just making better use of my income.
Mismanaging your money can cause you to dislike what you do for a living. You might feel like freelance writing isn’t paying enough money, when the truth is that you’re throwing your money away. At that point, you need to take a closer look at your spending to figure out whether the problem is the income or the spending.
How to Track Your Spending
1. Get a journal or log where you can write down all your transactions. This log can be a number of things - a notebook, PDA, spreadsheet, financial software, etc. Just make sure the log you create is something you can maintain.
2. Record your purchases at least weekly, but daily is better until you’ve created a routine. You can record expenses in a few ways:
- Write them down as you go.
- Save all your receipts.
- Download transactions from your online bank account.
- Use a combination of all the above.
The key is to make sure you capture everything you spend. Don’t leave anything out.
3. Assign categories to each of your transactions, e.g. Food, Housing, Gas, Car Maintenance, Debt, Clothing, Medical Expenses, etc. Grouping your spending together helps you figure out where big chunks of your money are going. Keeping your categories generic will make it easier to eyeball areas where you’ve spent a lot.
If you want to get fancy, you can create sub-categories. For example, the Food category can be further broken down into Groceries and Eating Out. That way you can compare the two.
4. Total the spending for each category. Using a spreadsheet or financial software makes this step go faster, but if you’re not good with spreadsheets, a calculator will do just fine.
Make the Process Your Own
What I just listed is sort of the “textbook” way of tracking your spending. If it seems too tedious, I give you permission to take shortcuts where it makes sense as long as you track everything you spend.
I rarely have cash or pull cash from the ATM so that means nearly all my transactions go through my checking account. When I track my spending, I copy the data from my online checking account and paste it into an Excel spreadsheet. I assign everything a category and use the pivot table function to make a nice little chart. (The pivot table will automatically adds up your categories and formats the data into a mini-report.)
What the Results Tell You
One of the best reasons for tracking your spending is to figure out where you're wasting money. After you've done this exercise, you might find that your spending is under control. Or, you may see some areas where you could cut back.
The first time I did this I discovered that there were some categories that I could reduce spending. I also noticed that every month there was a different, unexpected "one-time" expense. I started budgeting for these mystery expenses and they became less of a problem.
You don't have to track your spending every month, but if you're currently having money trouble, I recommend doing it at least three or four months so you can discover trends with your spending. Or, you can use your electronic banking history to analyze the past few months of spending.
Do you track spending? What interesting things have you noticed about how you spend money?
My husband and I started doing this about a year ago. It was crazy to see that a lot of money was going to eating out… and I cook frequently! I think we both feel more in control of our finances now that we know where everything’s going and how we can make it feel like we have more money than we do.
Great tips. I’ve always been awful about tracking my personal spending. With business it’s easy because just about everything is digital and tied to one account. Personal spending is a bit more complex (I don’t use credit cards, and prefer not using debit cards all the time because they make it even easier to overspend and under-think — for me). I know groceries are a big expenditure for me, and one I need to cut back on. Or “eating out” I should say. During the week I’d just be cooking for myself — something I greatly dislike. So I often eat out instead. And yikes, does that stuff add up. Is it worth it? 95% of the time I’d have to say it’s not. I’m also sometimes a big giver when it comes to donating (that I don’t change) and I’m also generous with gifts for friends and family (which I also won’t change). But there are definitely places to cut back — probably for all of us.
I did the same thing with my personal expenses. I was shocked at some of the things my husband and I were buying. (Let’s just say that for what we spent in late night snack runs to the 7-11, we could have put a vending machine in our bedroom!!) And I’m just the opposite of Jenn: if I carry cash, it slowly disappears but if I have to run my debit card, I’m more likely to think about it.
Same here. If I use cash it goes quicker.
Even when I keep a lot of cash on me, which I often do, I find that I’m just far less likely to spend it. There’s something about parting with “real money” that makes me think a bit harder about purchases than if I’m just going to swipe a card where I won’t really worry about what I spent that day until I’ve gone home and checked my balance. I still use debit cards often enough. But the cash really helps me avoid binge-spending when I’m just out shopping for the sake of shopping. I still use debit cards for most everyday things like groceries (even though I should probably change that since it’s an area where I need to save in general).