Track Your Spending: The First Step to Managing Money Better

It is very likely that you realize you have to gain control of your finances. You want to manage money better. The question is where do you start? To put it simply, you must track your spending in order to have better personal finances. This article tells you just why and how to actually do it.

So you feel the need to improve your financial habits. You know you cannot go on with your money as you currently do for it is getting you nowhere. You have dreams and aspirations.

If you are serious about making changes with your money you first need to make a commitment to be disciplined. Everything else will follow.

Next you need to start tracking your expenses – every single dollar that goes out. This is essential to becoming accountable for your own money.

Why Should You Start With Tracking Your Expenses?

Let us understand why keeping track of your spending is the foundation for the rest of your budgeting process and the best place to begin improving your money situation.

You are looking to get your finances in order. First, you need to be aware of them. Sometimes seeing real numbers is the wake-up call you require to get your act together.

If you have been feeling overwhelmed by the thought of making a personal budget OR if you don’t know where to start budgeting, the solution is simple. Track your spending. By just being aware of how much you spend can make you purposeful about it. Reflection on the purchase can help you realize if it was impulsive. Tracking your spending gives you control and reduces overwhelm.

Maybe you have a lot of debt that you want to get in control off. In that case, you need to be aware of what lifestyle choices you can make. Having a real picture of where your money is actually going will help you do just that.

Unable to save at the end of the month? Once you track your spending you begin to realize that the money you have to get you through to the month is finite. This leads to making better choices about spending the limited money. You start choosing a saving goal according to your priorities.

Creating a better budget that you can stick to. Don’t want to fail at budgeting then you need to be aware of what is happening in your life. You can then slowly adapt your budget to meet the goals you set out for yourself. But if you make a budget by using imaginary numbers, then it is a sure shot recipe for budgeting failure.

How Do You Track Your Spending?

The underlying principle to track your spending is to note down every dollar that goes out. Regardless of the method of budgeting you use or your choice of a tool the ground rule remains the same.

Step #1: Identify broad categories

If you are just starting off, remember to keep your categories broad and simple. You can, and will, refine your expenditure heads as you go along.

Here is a list of categories to help you get started. The subcategories in brackets are a guide to help figure out what goes where.

  • Home (mortgage/rent, maintenance)
  • Utilities
  • Transport (buying costs, fuel, parking, tolls, cabs)
  • Food and Supplies (groceries, eating out, coffee shops)
  • Children (tuition, sports, activities, clothing and gear, toys, supplies, childcare)
  • Personal (clothing, phone, fun money, hair, cosmetics, hobbies)
  • Lifestyle (pet, hosting, entertainment, subscriptions, cleaning service, yard/pool maintenance)
  • Insurance (home, vehicle, medical, valuables)
  • Tax (personal, property, any fees related to taxes and filing)
  • Health (doctor, medicines and supplements, gym, copays)
  • Debt repayment (additional payments over the minimum dues)
  • Giving (church, charity, political)
  • Events and Gifts
  • Travel (flights, stay, food, entertainment, shopping, local travel)
  • Savings (emergency funds, goals)

Step#2: Record every single expenditure transaction

You need to note down every single item of expenditure. You need to have a record of where every single Dollar goes.
This means you need to record cash spending, spending on your credit card, transactions from your checking account.

Here is an important concept to understand that will help you avoid a lot of confusion. Each of your credit cards, savings account, checking accounts or cash envelopes is an account you have where money comes in and is spent from.

Movement of money from one account to another is not an expense and does not affect your total finances. I note any such transaction where money is taken from one of my accounts and put into another of my accounts as a transfer and not count them as an expense. (This is explained in further detail with specific real-life cases later in this article.)

Movement of money from one account of yours to another account of yours is not an expense.

The only thing to bear in mind is if you are paying off interest due on your credit cards from one of the other accounts. That is an expense and needs to be noted accordingly.

Step#3: Fix a routine

I find it best to have a fixed place and time to do all my budgeting related tasks which includes updating my expense tracker. I don’t spend money every single day, but on the days that I do, I make it a point to log these down in the evening, before something slips my mind.

Tools To Help You Track Your Spending

There a many digital and analog tools available to help you track your expenses.

Digital tools can vary from apps available on your phone and computer (like Mint) to a spreadsheet in Microsoft Excel or in Google. These are complete budgeting tools that go beyond simply recording your daily expenses, which could be slightly daunting to start off. Also, many of them are completely free or have a free version, there are paid versions available too.

Analog – You can create your own expense tracker in your journal, a little notebook or on a sheet of paper filed in a binder. As for the format, you can create one that works for you or use one of the multiple formats available on the internet.

The point is, there are many methods and tools to choose from to track your spending. Here are some.

What you choose depends on your habits and preferences. Are you a pen and paper kind of a person? Maybe you love Excel worksheets. It is possible that you find it convenient to use apps on your phone. Think about what kind of a person you are to select a way to keep track of your expenses.

Whatever works for you is great. While paid budgeting tools do have their benefits, when you are just starting off, a free tool is more than adequate.

Why Should You Track Your Spending?

By keeping track of expenses, you can accomplish the following:

Know exactly where your money is going.

Identify problem areas in your spending habits. This is an opportunity to reflect on what your priorities are and if your actions are matching those priorities, which is such a therapeutic exercise.

Gaining control of your finances. In order to learn to manage your money better, you need to start by knowing where your money is going and how it is being spent.

Difficult to keep track of things in your head. Even a few days later I may forget an odd expense, so I make sure to update my expense tracker regularly.

Helps you be more intentional about your expenses. I always thought that I was purposeful of where my money went. However, keeping a log of my expenses helped me identify areas where I wasn’t being as frugal as I believed I was like the monthly subscription for a service that I hadn’t used in months that was being debited to my account each month.

Things To Note When You Track Your Spending

Double Counting Expenses

This is a common mistake which occurs when you start tracking your expenses and can create a lot of confusion.

In order to avoid double counting an expense, you have to differentiate between:

  1. a transfer from one account of yours to another, and
  2. an expenditure.

Credit Card Bill Payment

One place where double counting could occur is when you are paying your credit card bill.
If you pay your credit card bill in full each month then your credit card bill payment is nothing but a transfer from one account to another and does not affect your total finances. It should not be tracked or counted as an expense.

The reason is that you have already counted each of the purchases made on your card as an expense on the dates the items were actually purchased. If you count your credit card bill payment as an expense too then you are essentially counting the expense twice.

This is, of course, assuming that each of the items of in your bill has already been noted when it was actually paid as it should be.

However, if you are paying anything less than the full amount due each month, then you will also be paying interest (and other charges) on your card in the subsequent months. You need to track and count the additional fees and interest each time you pay it.

Funding Cash Envelopes

Another common example is when you put bills in cash envelopes to use.

Taking cash out of either your savings or checking account to put in your envelopes is a transfer and should be noted only as such. It is only a detail that will help you know the exact flow of your money within YOUR different accounts and helps you to keep a running balance of your various accounts. It does not affect your total finances.

When you actually use the cash to buy your groceries or to pay your mortgage company or even pay interest on your credit card then you need to note it down.

Funding Saving Goals

A third example is funding sinking funds.

If you save for a holiday, for events, or to fund large transactions in months prior to when you are actually going to be spending the money then it is simplest to expense these amounts saved each month. In other words, count the transfer as the expense. This is opposite of what we do for funding cash envelopes.

Confused? Let me explain.

Creating a sinking fund is unlike cash envelopes for your monthly expenses where the funding and the expenses occur in the same month. However, in the case of funding for your goals, the spending happens many months later. Therefore I treat these differently. I record the transfer to fund the account as an expense.

Say you put aside $100 each month to buy a new phone, then you record an expenditure of $100 dollars to your phone fund as an expense. In the month that you actually go and buy a phone, you simply make a note of the purchase (for the sake of completeness and for tracking your actual cash flows) without adding the phone cost as an expense for that month.

Read: How to Budget For Christmas
Read: Have a Stress Free Christmas: Tips from the best finance bloggers and gurus.

What Happens After You Track Your Spending?

Right from the first month itself, you will feel empowered about your finances.

Patterns will start to emerge. You will notice how your expenditure varies during the month and across the months. It will become easier to remembers which bills and monthly recurring expenses are due and when they are due. These could be anything from mortgage and insurance payments, utility and phone payments, school tuition, or annual subscription payments for Netflix or even Microsoft Office.

New categories may emerge. For the first two months of logging my expenses, I did not have a travel sub-head. There were no expenses related to travel so there was no category. It only came up in the third month. In the first month, I did keep money aside for Christmas. In the second month, I set up a Christmas fund.

Categories will become clearer and get realigned. Not only do new categories emerge, but they may also get realigned. Do you want to put home insurance payment under Home or under Insurance (along with other insurance payments?) Honestly, there is no one answer to this question. It depends on your preference.

There will be certain heads of expenditure where you can make changes to align them with your goals.

Tracking your spending is the first step towards budgeting and achieving financial goals. Once you know where your money is going you can start planning how to spend your money. We will talk more about it later.

Tracking your expenses may seem like a lot of work in the beginning but trust me, it is so worth it. Just start!

Got any questions? Leave me a comment below and I will get back to you.

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11 Comments

  1. Archana

    November 21, 2018 at 7:23 am

    That’s a very useful Post. Thank you.

  2. Nanditha

    November 21, 2018 at 7:38 am

    Bookmarked this! Informative read. 🙂

  3. Deborah

    November 21, 2018 at 7:25 pm

    Well put – it is similar to what I do except the sinking fund a/c – which is a good way to do it. This – because otherwise it throws the figures askew. Thanks for this helpful post.. I’m on the right track!

    1. pennies4cents

      November 21, 2018 at 11:07 pm

      Do you have a sinking fund or some kind of fund for large expenses? How do you expense those? Glad you are on the right track

  4. Talva Lockhart

    November 21, 2018 at 7:45 pm

    Great post!! I am always looking a new ways to budget my finances.

  5. amira

    November 21, 2018 at 8:55 pm

    This is a great post filled with actionable tips that we all can implement! I really liked how you broke down the process of “how to track your expenses” and then you explain why we should do that. A lot of people are not good with managing their expenses, so this will help them!

    Thanks for sharing,
    Amira at ASelfGuru.com

    1. pennies4cents

      November 21, 2018 at 11:08 pm

      Thank you, Amira.

  6. Ashley N Rice

    November 21, 2018 at 9:01 pm

    So helpful!! I really need to start doing this!

  7. Narmeen

    November 22, 2018 at 9:19 am

    Great article. Ive been trying this out for the past year and its helping me keep on track.

    1. pennies4cents

      November 22, 2018 at 9:25 am

      Glad to hear it is helping you.

  8. Lauren

    November 22, 2018 at 10:51 am

    This is so smart! Thank you for sharing this!!

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