Personal spending tracking is an important skill you should learn and use regularly. You should know what you are spending your money on, and how much you are spending. One big reason for this is that this is the only way you can know for sure if you are WASTING money. I define wasting money as spending money on things that don’t move you toward your financial goals (remember, your financial goals take into account and support your life goals!).
You need to keep a record of everything that you spend money on, because this is how you begin to understand your current financial situation. It is critical to actually track your spending and know where it is going, so you can adjust as necessary.
What Do I Need to Track, and How Often Should I Do That?
Start with tracking the money you spend, then start tracking the money you receive. The more disciplined about this you are, the better knowledge of your situation you will gain, and the better decisions you will then be able to make.
It is easy to see how “saving money” is likely to move you toward your financial goals. But paying the electricity bill is also likely to be moving you in the right direction. Even though the electricity bill is required payment, every month for most of us, you have to spend this money to get by – most people consider utilities, rent/mortgage payments, groceries, etc. necessary expenses (if you don’t pay these regularly, things will start to go south on you quick).
However, it is not as easy when it comes to “discretionary spending”. Discretionary spending is stuff that you CHOOSE to spend money on, and that won’t really hurt you if you don’t spend that money. This is kind of like the spending we do on our “wants”. For most of us, a new set of golf clubs is discretionary spending (a “want”). So is a 10th purse (most likely). Vacations, while needed on some level, can be delayed and so can always be considered discretionary spending also. I’ve provided more information on tracking essential and discretionary spending below.
The best way to do this is to track your spending, and it is actually possible these days to track it weekly or even DAILY.
Tracking spending DAILY? Won’t that take up all of my time?
No – tracking your spending daily is not as hard as it sounds. As often as you can, you should download all the transactional data from your checking accounts, savings accounts, credit card accounts, etc. that have occurred since your last download, for review and historical purposes. You then should add enough notes to each transaction to help you remember what these expenses were for (and any other details you want to keep for historical purposes) and put them into spending categories for later review.
The more frequent you do this and keep up with it, the less effort it is to keep up regularly. If you wait longer than two weeks or so between downloads, you might have to plan to spend several hours categorizing and updating all of your transactions! The goal here is to get into the habit of doing this regularly, and if your mind says it is too hard, you won’t ever do it – so do this OFTEN.
Most banks offer data downloads in several different forms, including spreadsheet-friendly formats and files that can be then uploaded into financial software packages. Spreadsheets are fine, and I have used this method in the past, but the easiest way to do this (and really the only way I recommend) is to do this download from your bank into a program like Quicken. There are a number of personal finance software packages out there, but the standard and most used program is Quicken.
Quicken makes it easy to import and categorize your spending, so that you can routinely take stock of where you are going right, and where you are going wrong. You can get reports and printouts of your current situation, and for any time in the past (so it is also a great way to “remember” what and when you bought things, and did things – a great help to your memory!). Quicken also can interface with its companion tax software program, TurboTax, which is convenient when managing the chore of producing your taxes annually (and for other tax-related tasks).
I use both Quicken and TurboTax; however, if you want to interface Quicken with TurboTax for your taxes, I recommend planning for this RIGHT AT THE START when getting started with Quicken (or at least, right away at the start of a given tax-year). Learn the ways to mark your transactions with their tax-related information and start keeping up with this right away. Going back to Doing this after you have already gathered months of data in Quicken will make the process of updating transactions difficult.
Also, as you get some financial discipline (so that you keep the account paid off every month) it is best to do most of your every-day transactions on a bank-issued credit card (preferably only ONE card). This provides you with easy access to pay bills, transfer funds, etc. online, and you can easily download all of your transactions from one bank account, rather than having them spread out all over many different accounts.
Your bank will be able to provide all of the details for you on their website as to how to get started with online banking. Most banks now provide this as a free service to its customers.
What are some other benefits of electronically tracking my expenses?
Once you start downloading your bank account transactions and reviewing and categorizing them, Quicken will start automatically start putting new expenses from these payees into the right categories. You may wish to add details in the “Memo” field to further keep a record of where, when, with whom, etc. you are spending money – again this helps keep your financial “memory” up and I have found being able to search my Quicken database for things, people, certain charges, etc. in the past VERY helpful.
You may from time to time come across expenses that you are unfamiliar with. Where did this come from? Often this is a charge that was put on your card by another member of the family – by getting a handle on your daily expenses you are gaining the ability to find out where charges like this are coming from.
You may even find a charge or two coming in EVERY MONTH or every year that you were completely unaware of – sometime you will find it is a legitimate charge that you agreed to at one time, and just forgot about. But sometimes you will find that you had no idea that you were being charged and you need to investigate and put a stop to it immediately. If nothing else spurs you to start monitoring your spending regularly, finding a charge or two like this will certainly do it!
What should I consider when tracking expenses?
Two of the most important reasons for tracking your expenses are that it gives you the ability to 1) identify how much you are currently spending on essential items vs. discretionary items, and 2) make a personal budget that you can stick to month to month in order to control your spending.
Essential vs. Discretionary Spending
It seems obvious, but there is a lot of value in identifying just what you are spending on Essential expenses and what you are spending on non-essential, or discretionary expenses. Getting these numbers in front of your eyes may be just the motivation you need to get serious about setting financial and retirement goals.
Essential items are related to food, clothing and shelter, of course, but also everything else that YOU consider to be non-negotiable when thinking about what you might want to cut out of your spending in order to save more money or re-allocate your spending. Essential items are those you are just going to assume you will have, no matter what.
Discretionary items are those that aren’t essential items. There are definitely a LOT of items you will find in your regular spending patterns that you could do without completely, or that you could reduce the regularity of and get by. Although you may not like it very much, you may (for certain of these items) need to cut these items out from time to time, or permanently, if you are going to be able to meet your retirement and life goals.
There is a lot of grey area that you will come across as you categorize your expenses month to month. You may well find that you started categorizing certain expenses one way (i.e., gas for your car as “Auto Expenses”, and then in a certain month you started categorizing them differently (“Auto Expenses:Fuel”, or “Miscellaneous Expenses”). You need to resolve these differences, so that (unless you have a good reason) you are collecting all of the expenses associated with similar types of expenses in the same categories – i.e., the categories that will make sense to you when you are trying to control spending to a budget amount.
Budgeting is a tool that helps keep you on track in meeting your financial goals. This again may seem like a really obvious fact, but many of us just never put a budget in place. This is either because
- we are living comfortably right now, however that is happening (maybe we have lots of income or few expenses, or a little of each and there seems to be money left over in the checking account every month), or
- the effort involved in tracking expenses and budgeting just seems like too much work (probably again because we have some level of financial comfort right now!), or
- maybe we just don’t know how to track and budget our expenses.
You may have other reasons. But this really should not be viewed as optional if you are going to be serious about enjoying your retirement (and really, your life financially, even before retirement!). You should develop some type of budget that you monitor regularly and attempt to stick to as best you can in order to reach our financial and retirement goals. For help with budgeting please see my post What Is A Monthly Budget?
Do I need to keep receipts for cash purchases?
Yes, you really should. Again, you need to know where your money is going. If you do a lot of cash-spending and don’t keep receipts, it will be easy for you to spend a lot of money and not have any idea where it went at the end of the month. You could keep a “Miscellaneous Cash Expenditures” category in Quicken, but you should try to minimize the amount spent in this category per month, because all it really tells you is the amount of money you’ve spent in “miscellaneous items” – i.e., if it is too much, or doesn’t stay somewhat constant every month, you know that you should try to put more of these items on your credit card or check purchases so you can more easily track them.
Keeping receipts for smaller items allows you to actually enter the details as to what the purchases were for into your Quicken transaction register. You should keep receipts at least for anything over a certain dollar amount, and I would keep this dollar amount at a low level (say $5.00 or less). Doing this forces you to keep things updated manually in Quicken as well, so after a month or two of doing this, you will likely start just doing most of your transactions by credit card (which are easily downloadable from your bank).
Personal spending tracking is doable and with effort will significantly contribute to the successful achievement of your retirement goals. If you are not already doing this, get started on it today!
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