Since the fall of 2012 (when I finally moved out of the nest), I’ve tracked every single penny that I’ve earned and spent. Every penny for over four years. During that time, I used one primary method to track all my spending. I’m going to show you my easy method to track expenses here today.
In concept, tracking your expenses is very simple. So simple a third grader could master it. But in practice, it is a little more difficult. It requires a lot of discipline to stick with it day after day and month after month. It is the foundation of personal finance and managing your money.
If you treat yourself like a business, then you know it is absolutely critical that you have an Accounting department. Every transaction must be recorded to know if the business is actually making money and how much. Making business decisions without a thorough understanding of the financials leads to poor decisions. Likewise, if you don’t have a firm grasp of your personal spending, you can’t make the best decisions for your financial future.
5 Reasons You Must Track Expenses
- Awareness – The most important thing that tracking expenses does is create financial awareness. Sometimes it’s scary to face yourself in the mirror, but better the devil you know than the devil you don’t know. The cost of financial ignorance is very expensive.
- Habit Change – Financial awareness allows you to identify serious spending issues, appropriate spending areas, and areas of improvement. Without being able to identify the problem areas, you don’t know which habits to change. You may not realize that going to the bar 1 or 2 times per week ends up costing over $500 each month.
- Meaningful Budgets – A budget is worthless if you don’t measure your actual performance. A $700 food budget is meaningless if you don’t know at month-end whether you spent $400 or $1,000. Before you can create an effective budget, you first need to know your current spending data.
- New Worth Impact – The whole purpose of a meaningful budget is to ensure that you are building your net worth. Tracking all your expenses and subtracting that from your earnings lets you know your monthly net income.
- Retirement / Financial Freedom – One of the most exciting aspects of tracking expenses is knowing how close you are to financial freedom. I first started tracking my expenses when I was single and living with roommates and discovered I was only $2,400 per month away from financial freedom. That’s only 3 or 4 rental properties! Now I’m married and our joint expenses make it more like 10 rental properties.
How to Track Expenses
There are many free apps available to help you track expenses, but I always prefer using my own spreadsheets. That enables me to have the most control over what I’m doing. I understand that being able to access your spreadsheet on your phone makes tracking significantly easier, which is why I prefer Google Sheets over Excel. You can download the Google Sheets app and pull up your expense tracker wherever you are to input a transaction or monitor your spending. By combining the expense tracker as separate tabs within the same spreadsheet as the bill tracker, you can have all your finances in one easy-to-access location.
It helps to choose a specific time each day where you record all your transactions while they are still fresh in your mind. It only takes a few minutes. You might do it right before you go to sleep. Or you might do it before you leave in the morning. If you use credit cards responsibly, I advocate using credit cards for all transactions possible to accumulate rewards points but also to make tracking easier. Cash transactions can easily be forgotten while credit card transaction are posted in your account. It’s easy to log in once a day and copy over the amounts.
Expense Tracker 101
A simple method to break out your monthly expenses is making each column in your spreadsheet a spending category and each row a different day. You can make your categories as broad or specific as you like. Typically, the bigger the category the more beneficial it is to break it down into subcategories. For instance, food is one of our biggest categories so I break it down into Groceries, Lunch, and Dining. That enables me to better identify where exactly our food spending is going. For every single expense incurred, you record that transaction in its respective row and column.
Highlighting the weekend rows makes it visually easier to input a transaction and identify spending patterns. Each time an amount is input the totals automatically update for each day and category by using SUM functions. The daily totals are not anywhere as significant as the category totals since a budget is based on the categories. By including each category’s monthly budget at the bottom, you can always see whether you are on track and by how much.
By including your income in the Earnings column, this spreadsheet becomes your monthly income statement. You can see exactly how much money you made (or lost) at month-end as well as exactly where you stayed on budget and where you may have gone over. In this example, dining out too much was the biggest issue. The Description column is helpful for transactions that aren’t self-explanatory (monthly recurring) so you can remember what the costs are related to when you review it.
I call this Expense Tracker 101 because it builds the foundation for tracking all expenses (and income). The most important thing to build is the habit. Anyone can spend $50 on groceries and record that. But can you record it every time you buy groceries? And lunch? And gas? And dinner? And drinks?
If you are brand new to tracking spending, don’t worry about setting a budget for the first 2-3 months. Those months are for collecting data so that you can set a meaningful budget. Once you master the Expense Tracker 101, you can move on to the next level of tracking income/expenses. In a future post, I will explain my General Ledger method.