You have a 6-month goal and you’ve made a quick start by cutting out one expense for the rest of the month. Day 3 of the Frugal Fresh Start Challenge starts a habit that is essential to improving finances – meticulously tracking your spending. I don’t think there is anything more critical to personal financial success than really understanding where your money goes every month. Even people who think they have a good idea of how they spend their money end up being surprised when they carefully track spending and add everything up.
“Measurement is the first step that leads to control and eventually to improvement. If you can’t measure something, you can’t understand it. If you can’t understand it, you can’t control it. If you can’t control it, you can’t improve it.” – James Harrington
Most of us know we could do better with our expenditure, but until you know exactly how much you spend on what, you don’t have enough information to see clearly. If you can’t see your expenditures clearly, you can’t choose to make the most effective changes in your spending habits. Some expenses are overlooked because they happen automatically. Others don’t seem significant until you aggregate a month’s worth of individually small transactions. Whether it’s seeing how much you really spend on eating out, or what parking fees actually amount to, or how much groceries actually cost, tracking your spending in detail is always an eye-opener.
Start From Today
Don’t bother back-tracking. Just start from today. Trying to recreate past spending is frustrating and unproductive. Start today. Write down everything you spent today, including cash purchases, checks, online purchases, automatic withdrawals and bill-pay. Everything! Then do it again tomorrow.
The easiest way to track expenses is also the simplest – get a pad of lined paper, write the month at the top, and add one expenditure per line for every expense of the month. If you’re comfortable with Excel or another spreadsheet program, a spreadsheet is the electronic version of lined paper. You don’t need any fancy tools to track spending, just the commitment to actually do it every day.
Be meticulous about your categorizing. Avoid categories like “shopping,” “miscellaneous” or other catch-all categories that don’t force you to analyze your purchases. Knowing that you spend $300 a month on miscellaneous things isn’t very telling. You really need to know where your money is going in order to improve your financial habits and be more frugal. We’ll get more into categories next week when we start in on budgeting, but for now, just be careful not to be overly broad in your categories.
Be careful of using programs like Mint to categorize for you. When you start paying attention, you’ll realize that Mint actually doesn’t do a very good job of categorizing your spending. You can still use Mint to track spending, just don’t count on it being as automated as you think. You will need to manually adjust the categories for many transactions. It’s pretty hilarious sometimes to see Mint guess at the expense category.
While it is convenient to have transactions automatically appear like they do in Mint, real awareness of your spending habits comes when you manually enter transactions. Not only will you get the category right the first time, but you’ll have an intimate relationship with your spending, as it happens, every day.
Expense Tracking Spreadsheet
I created a basic Expense Tracking Spreadsheet that you are welcome to download for free. There are several sample entries to give you an idea of how it works. You can delete them when you start. I have some common categories already listed, but you can edit them to fit your specific needs. As you will see, I focused on variable expenses, but you can add categories for the fixed expenses as they occur. We will talk about budget categories in detail next week.
Be sure to split transactions that cover more than one category. For example, transactions from Walmart or Target could have groceries, household items, clothes, gifts, or other categories all on the same receipt. People fall into the trap of using categories like “shopping” and “miscellaneous” because they A) are too lazy to split up the transaction, or B) don’t have their receipt to know what they bought.
For those of you who have started using YNAB to budget, you are already tracking your expenses! YNAB’s mobile app allows you to enter your spending right when it happens and then syncs with your desktop budget and your other devices, making it easy to stay on top of your expenses, especially when there’s more than one spender in the household. Since tracking expenses is inseparable from budgeting using the YNAB methodology, I will wait until we talk about budgeting next week to show you how it works.
Here are a few tips to help you:
- Save your receipts. Looking just at your credit card statement won’t tell you what you bought at Walmart.
- Be sure to include online transactions.
- Include automated withdrawals and bill-pay transactions.
- Don’t forget to enter cash transactions.
- Do it every day. If you let four days go by, you can recreate your spending, but it’s painful and unnecessary. Just do it each day before you go to bed.
If you’ve never diligently tracked your spending and you’re under the impression that this will be a fun or easy exercise, I warn you that it probably won’t be. You’ll have to be meticulous and diligent. Starting new habits is hard. Seeing the actual numbers written down might be discouraging. I promise it will be worth it to get a clear picture of where your money is going.
Tracking your spending might even help you curb habits. You might avoid making unnecessary purchases just so you won’t have to write them down, either for shame or laziness. If you’ve ever tracked your food intake for a health class or to improve your diet, you may have noticed this same phenomenon. It’s a nice side benefit of tracking your habits.
Challenge– Day 3
Start tracking your spending, every expense, every day, for the rest of the month. I simply can’t adequately express the importance of this exercise, even for those of us who think we already know all about our expenses.
Have you tracked your spending before? How did it go?
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