How to Track Expenses
Budgeting | Saving Money

How to Track Expenses

You might be tempted to think that tracking expenses is reserved for those who spend more than what they earn. You know, those of us who are wondering where all their money went because all of it is somehow gone before the end of the month.

While it is certainly true that those who are reckless with their hard-earned dollars would benefit the most from it, expense tracking is for everyone that has an income and wants to exercise greater control over their personal finances. Do it yourself, and the findings might surprise you, even if you believe that you are in good financial standing. This is especially true in terms of the results you can get while pursuing long-term financial goals.

Budgeting 101

You’ve probably heard it – the first step is to create a budget. Now, budgets don’t “do” anything on their own, they simply account for the flow of money. In essence, they are the same, regardless of whether we’re talking about personal, corporate, or national budgets, and their purpose is to use past and current expenditures in financial planning for the future.

In personal finances, there are three important streams: income, expenses, and (hopefully) savings. Weekly budgeting works best for the close monitoring of expenses, yet the typical period covered by a budget is a month. Generally speaking, it’s much easier to follow income because there are fewer items on the list. This is true even if you have alternative income streams like side hustles, rental income, affiliate marketing, collecting royalties, or collecting cash dividends on your investment. For most of us, though, the income column is mainly populated with the regular monthly paycheck.

The spending streams are where the trouble is because they encompass a large number of segments in a budget. Expenses like housing (rent or mortgage), food, transportation, and utility bills cover the essentials. But the monthly spending includes many other items as well. For instance, eating out, monthly subscriptions to products and services (gym membership, cable TV or magazine), gifts to family and friends, entertainment (concert or movies), clothes, pets, hobbies, donations… You can imagine this list continuing for quite some time, can’t you?

And then, there are the savings. That is, if the money isn’t too short for your month. 

Record your expenses

You will not get a clear picture of your spending habits until you start to carefully record every single expense in a month – particularly if more than one person puts their hand in the jar. You might believe that you have an idea where most of your money goes, but rough estimates will do you no favor. Especially if you are up against long-term goals like debt repayment or saving for retirement.

So, the first goal of making the effort to record all expenses is to identify specific amounts of money that go down the drain. We are talking about figures that can be assigned to purchases (or spending) due to receipts, bills, or bank statements. In essence, you are creating a ledger, but we will expand on this further below.

The next step is to put them alongside similar expenses and label them accordingly.

Categorize expenses

Some expenses are recurring while others are either one-off expenses, or they appear only a few times a year. At this point, your personal budgeting follows the example of categorizing cash flow as a small business. Essential expenses like mortgage payments, some utility bills, or debt consolidation plans resemble fixed costs in business – and you can expect these items to remain the same throughout a long period of time.

There are a lot of variable expenses as well, and they are best described as a range or percentage of the total budget.

You can also create a separate category for each type of variable expense; for example:

  • transportation would cover: gas for your vehicle(s), Uber, taxi, public bus, and metro;
  • insurance can cover: health insurance, car insurance, life insurance, home insurance;   
  • donations can include donations to religious organizations, contributions to political causes, charity.

While most of the thinking is done within a preset time frame (a month), it’s recommended to take into consideration one-off expenses as well. Your annual auto insurance installment is one example of this, but there are many others. Can you really be surprised by an increase in spending during a day of back-to-school shopping for your kids, or by gift shopping before Christmas?

The benefits of classifying your expenses

Why go through all that trouble of putting recorded expenses into categories? Well, it’s pretty simple if you think about it – it will help you identify costs that overlap in a way. Let’s take transportation as an example. Once you note that your Uber and taxi receipts considerably exceed your spending on the metro and public bus, you might reevaluate your approach to making your way across town.

Another example is food and drinks. If you put your monthly budget for groceries next to the amount of money you spend on takeaway coffee each day, you might arrive at the conclusion that it’s time to change some of your habits.

The categorization of expenses also helps to compare total spending in different categories. This is very useful if you are still figuring out the exact percentage of expenditure you want to ascribe to a category in your budget. Let’s say, you notice that 30% of your monthly spending goes for entertainment purposes – having an insight into the size of this portion of expenses relative to other categories can prompt you to cut down on visiting concerts and sports games.

As you can see, a lot is at stake when you record monthly expenses, so it’s important to do it right. Of course, there is more than one proper way to go about this, so let’s review the most prominent options.

How to track expenses 

Before we delve into different expense tracking strategies, just keep in mind that every expense counts, regardless of whether it seems inconsequential at the moment of purchase. In any case, you can choose a method that is most convenient for you and that will motivate you to keep track of every last penny.

Paper and pencil

Paper budgets are the oldest method on this list and it’s great for those who don’t mind doing paperwork. You literally just need a notebook and a pencil to do it. The biggest advantage of this method is the fact that our brains work better when we physically write things down. On the flip side, these days, not all bills are on paper (and even if they are, they can be lost beyond recovery) so the processing of data might not always go as planned.

The envelope system

This is also an old-school method because it involves the physical compartmentalization of your monthly budget (in cash) by using envelopes. For example, you can set aside a certain amount for grocery shopping in a marked envelope at the beginning of the month. When you go to get food, you intentionally reach for this envelope, that is, up until the envelope is empty. 

This method works for every category of expense as long as you don’t mix it with other money. The primary drawback here concerns cash, not the envelopes – do you pay for everything in cash? And even if you use cash, do you want to keep your monthly transportation envelope in your house or you want to take it with you? Obviously, both options expose you to the risk of robbery.

Bank statements

Banks send spending reports to their clients both online and on paper. They are traditional, but they often feature a detailed breakdown of income streams and expenditures within a preset time frame, and can sometimes process data based on specific indicators. The same goes for credit card issuers.

In a way, banks do the work on tracking budgets for you. At the same time, not all expenses are tracked by banks (mostly referring to cash payments here), so you will have to account for your cash spending on top of these reports.

Spreadsheets 

You either enjoy filling out spreadsheets or you outright hate them. These days, you can easily find an offer on (often free) spreadsheets that are tailored for budgeting online. They include separated columns, tags, formulae for calculations, and other perks. Alternatively, you can develop your own customized budgeting spreadsheet.

The drawback – someone needs to set aside time to put data into the spreadsheet. And not only that, but to do it diligently, too. Some would definitely prefer using their smartphones to track expenses.

Apps on your phone

We all know how apps work, and using them to budget is very convenient. Budgeting apps can streamline the process and not only simultaneously track spending across different bank and credit accounts, but they can also sync up tracking with your family – be it children, partner or spouse, or parent(s). Spending can get tags so you can track it in real-time, and automation eliminates the need to populate data.

But, as with any other digital tool, if it communicates through the internet, it’s hackable. Be mindful of providing access to your financial data to third parties without adding at least one extra layer of security.

Advanced budgeting

Once you have records of past spending and you actively track current spending, it’s finally time to start analyzing the data. The end goal is to make better decisions in order to achieve your financial goals. You can probably conceptualize long-term goals like sending your kid to college, repaying debts, saving for retirement, or building an emergency fund, but it’s better to focus on making small steps if you are new to budgeting.

For instance, you can begin with identifying and eliminating impulse purchases. Everyone is capable of making them and they can cause a lot of aggravation, especially for couples (but not exclusively).

Why do you track expenses?

Budgeting should be geared toward the planned allocation of your savings. Of course, you first have to have some extra money before you start to allot it to specific financial goals. 

The purpose of actively tracking expenses is to have a clear picture of where your money is going. But that’s only the beginning. The insight that you get should be used to find ways to reduce spending and increase savings across categories.

Overspending

You can start by dealing with overspending. Are you going way over your means in a category? If so, which category and what can you do about it? One of the typical reactions is to lower the spending limit for that category in the next month. You can use the method that is most appropriate for your situation. For example, if you use the envelope system – you can use taxis until there is money in the envelope, and then adjust your lifestyle and switch to using public transportation.

This mostly has to do with the near term, but what about long-term plans?

What should you do with your savings? 

It’s as important to have a clear plan on using monthly savings from each category as it is to reduce spending. Setting aside at least 20% of your monthly budget in savings is a popular approach, but this would depend on your specific circumstances. For example, if your immediate goal is debt repayment, then you can build an emergency fund (one month’s worth of expenses), and then redirect most of your savings towards settling the debt. 

In any case, keeping your savings goals in mind when you create a budget will help make the process more efficient.

In closing

Expense tracking is the starting point if you want to introduce planning to your personal finances. A number of methods can be used to record and categorize your monthly spending, so you can choose according to preference. Regardless of your choice, don’t forget that technology itself (or the method you prefer) will not save you from bad spending habits, so adhering to the plan you commit to is essential for success.