When it comes to the world of personal finance, one of the first steps in managing your money is to track your spending. The reason is simple - how are you supposed to know how much you're saving when you have no clue how much money you spend on a weekly, monthly, or annual basis?
Tracking your expenses can be incredibly rewarding. You might have a rough guess on how much money is going to certain places, such as rent, car payment, utilities, etc. but often times it's the small purchases that might seem insufficient that could actually be costing you much more than you imagined.
For the purposes of this topic, I will be using monthly increments. Weekly or biweekly purchases can fluctuate greatly and annual tracking will take way too much time to calculate. This exercise is broken down into five specific steps below.
1) Be honest with yourself
This is one of the most important steps. Honesty. In order to be successful at tracking your spending, you must include all expenses. Do not neglect small purchases even if they're only a few dollars. You must keep a level head and do not get discouraged when you see that final dollar figure. Keep in mind that financial independence is a journey and this is the first step of many. Don't let your mind take several steps back when you see exactly how much money is going to certain places. You simply won't know until you do it. And who knows? You might even be surprised that you actually spent less in certain areas than others.
If you are married or have a significant other, my advice is that you should try to do this together. Keep your spouse or significant other on the same page when it comes to money. Accountability for money management is huge and remember that you're both in this journey together.
2) Log in to all bank accounts that you use
This is pretty self-explanatory. Any bank accounts that you regularly use to make purchases should be included. This also includes specific store credit card accounts if applicable (Macy's, Kohl's, Target, Home Depot, etc.).
3) Write down all transactions that were made the previous month
This step will probably be the most time consuming. My recommendation is to go through one account at a time. Start with writing the date of the purchase, the associated account, a short description of what the purchase was for, and finally input the dollar amount.
You can do this a few different ways: 1) You could be traditional and use a notepad and pen; 2) You can use an electronic format such as a word doc or spreadsheet to compile the expenses; or 3) You can use a basic Expense Tracker that I created on Google Sheets. This spreadsheet contains four blank fields for the date, bank account, description of the expense, and dollar amount. The total amount will also be auto-generated at the bottom of the spreadsheet (for Step 4 below).
I found two specific approaches to be equally efficient. Pick the one that best suits you. The first is to start with the earliest monthly purchase and follow in a linear fashion until you get to the end of the month. This one is arguably easier because you can simply copy and paste the transactions from your recent bank statements.
The second approach is to group similar purchases together (such as finding all the times you went to Target last month or filled up your gas tank). Grouping purchases can take longer to compile because you might have to transition between different accounts and scroll through different purchase dates. However, it could actually make the list more organized and visually appealing. Do whichever fits your personal preference.
Link to the Expense Tracker Google Spreadsheet: https://docs.google.com/spreadsheets/d/1xvv2q7qIE37r7-lav-8zeQswAMhU0VG1TuPkiX1gQlo/edit?usp=sharing
When you open the Expense Tracker, go to File->Make a Copy. After you make a copy, you will be able to edit and input your own data.
4) Calculate the total
Add up the total of all accounts for the month. If you use the Expense Tracker, it will auto-generate the total at the bottom of the spreadsheet. Once you have the total, you can also compare it with your monthly income to see how much you were able to save or how much you spent in excess of your income.
5) Categorize them
If you already grouped your purchases using the approach from Step 3, then this is simply one step further. If not, don't worry. It's honestly not that difficult. Categorize the expenses (this is especially important when you create a budget). Consolidate and outline types such as food, rent/utilities, insurance, transportation, entertainment, etc. This allows you to see exactly where your money is actually going on a monthly basis. Using the Expense Tracker, there is a section for inputting the category associated with the expense.
Assessment
As I mentioned previously, this is only the first step towards financial independence. I hope this was an eye-opening experience if this was the first time you've ever looked at your spending this closely before.
To get a more concrete grasp of your average spending, I encourage you to repeat this process for the past three or more months. This will allow for a more consistent average, especially if one specific month incurred larger or atypical expenses.
Now that you know how to track your expenses on a monthly basis, the next task is to create a budget.
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