Tracking your expenses involves identifying your expenditures throughout the month. It's an essential activity that you should ideally do every day throughout the month.
It may seem like a lot of work to itemize your expenses when you first begin, but understanding why it's important to track expenses and how to do so with minimal effort can help you successfully commit to the activity and become more aware of your spending.
Reasons to Keep Track of Expenditures
Monitoring your expenses throughout the month holds you accountable for your finances in a few key ways.
It Helps You Stick to Your Budget
After you set up a budget, which is a monthly plan for spending that takes into account your income and expenses, tracking expenses daily is essential to keeping you on that budget. If you don't track your money, you won't know when to stop spending in a given category (food or clothing, for example).
At the end of each month, review the expenses you tracked to compare what you spent versus what you planned to spend according to your budget. If you overspent, look for ways to cut spending in a certain category. If you spent too little, you might want to allocate more to the savings and debt repayment. In either case, you'll want to use what you learn from tracking expenses and factor in any life changes (marriage or a new child, for example) to make changes to the budget for next month that put you on better financial footing.
For example, tracking your expenses might reveal that you budgeted too little for food or neglected to budget for one-time expenses such as holiday gifts, in which case you can incorporate these infrequent expenses and build a more realistic, comprehensive budget for the next month.
A budget is a living document that should evolve over time to suit your needs and goals. Recognizing that you are overspending or underspending consistently in one spending category in your budget can help you determine whether you need to make cuts or increases in that category for the next month's budget.
Tracking Your Expenses Can Reveal Spending Issues
Another reason you must identify your expenditures throughout the month is to become more aware of your spending habits. If you don’t know where your money is going, you won’t be able to recognize negative spending behaviors that you can easily change to make your money work for you.
For example, you might learn from tracking your expenses that you are paying monthly for a service you don't use (an unused gym membership, for example), in which case you could cancel the service or switch to a cheaper one. Or, you might realize that your habit of dining out or buying clothing from expensive brands is causing you to run out of money by the month's end.
Tracking your spending can also help you identify serious problems in how you manage your money. For example, as you gauge your expenses over a period of months or even years, you might observe that your annually increasing monthly rent now makes up an outsized percentage of your monthly income or that you aren't earning enough to lead the lifestyle you imagined. To correct problems like these, you might have to make more drastic life changes such as moving to a more affordable residence or getting a second job to earn more money. It won't be easy, but it will be worthwhile if it puts you on track financially.
True wealth is built when you spend less than you make, and to do that, you need to be aware of your spending and curb or eliminate expenses that are blowing your budget.
It Helps You Meet Your Financial Objectives
It's not enough to stick to your budget if you don't also make strides toward important saving goals. Whether you set a goal to build an emergency fund, pay down debt, set aside money for retirement, or save for college, vacation, or other short-term goals, you're more likely to achieve these goals if you budget for them, create a savings plan, and then track your spending to ensure that your spending matches your priorities.
If it's your highest priority to pay down high-interest debt, for example, include debt repayment as a fixed expense in your budget. Contribute the budgeted amount toward that debt every month and then track your spending to make sure that you paid down as much debt as you had planned. Once you pay it off, start on other goals that you couldn't fund while you were in debt, such as investing for retirement.
Methods for Keeping Track of Expenses
While a few approaches can help streamline and speed up the process of identifying expenditures, the best approach is one that you feel comfortable enough with to stick to every day.
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-fuss approach can tell you at a glance where your money is going. Although it may be more difficult to identify spending trends on paper, the method at least makes you more aware of your spending.
Make It Easier With an App or Software
A more modern and convenient way to track your expenses is in a spreadsheet or a web-based financial 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.
Work Together as a Couple
If you are in a relationship and have combined finances, you will both need to track your expenses. It's a good idea to choose an online app or another expense-tracking method that can sync your spending with your spouse's spending so that you don't blow your budget.
Smartphone apps for couples allow you to track your spending on the go. This can prevent the two of you from spending in the same category at the same time and will give you a sense of how much you have left in a specific category so that you can stick to your budget.
Unlike the balance at the ATM, which may not show transactions that haven't cleared in your bank unless it displays the "available" balance in addition to the "actual" or ledger balance, apps often track your expenses as you incur them so that you know when to stop spending.
Keep Going Even When You Overspend
When tracking your expenses reveals that you overspent in a few categories, it can be tempting to stop identifying expenditures and try again next month. But 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.
The activity shouldn't take more than a few minutes each day if you adopt an expense-tracking approach that works for you, but if you consistently track your expenses, you will be able to save more, spend less, and make other necessary changes to finances that will allow you to build wealth and go after the things you want in life.