One of the most important steps in gaining control over your finances and achieving financial independence is to learn how to track your expenses. When you understand where your money is going every month, you can better plan for the future and develop new spending habits to reach your financial goals. Getting started is the hardest part!
Tracking your expenses on a monthly basis helps you create new spending habits and provides you an opportunity to save money for:
- Dream Purchases (vacation, car, house)
- Kids (having a baby, child care, wedding, college)
The best way to understand what you spend your money on is to begin tracking your expenses. Your relationship with money will change as you gain knowledge of your spending behavior and patterns.
Tools You Can Use
There are some great free sites that are really easy to use (Mint and Personal Capital are the most popular), but you can also do it yourself manually in a spreadsheet. Personally, since I’m a finance/accounting nerd, I like to keep a spreadsheet and track my spending online. I like Personal Capital because it pulls everything (assets, debts, income and expenses) together in real time, so I can see where I’m at financially, as well as be able to track fraudulent charges immediately. I also like keeping a manual spreadsheet too because it gives me a better feel for where my money went on a monthly basis.
How To Get Started
To begin tracking your expenses manually you need to:
- Identify the major categories you spend money on – housing and utilities, your car, food (groceries and eating out), entertainment and travel, clothes, and all the other “small” things you buy.
- Get your monthly bank and credit card statements from the last few months, and track each expense in the proper category.
- If you use cash, start keeping your receipts and write down each time you buy something with cash. (This can be one of the biggest eye openers since these tend to be ‘invisible’ expenses.)
- After a couple of months, review the amounts you spent in each category and begin identifying areas you can cut. See my related post on “How To Cut Monthly Expenses” to get some ideas.
Once your take a look at how much you’re spending in certain categories, you will most likely have an epiphany or “oh, sh*t” moment. For me, it was seeing how much I was spending on clothes, shoes, and workout equipment, as well as eating out way too much. I began to question why I was spending so much on certain things, and then, if I stopped spending so much on these things, would I still be happy. I decided to try it out… and I found that I’m actually happier not spending on material things and enjoy making healthy meals at home. It has now become my mission to save money as I’m on the road to financial independence.
I went from spending over $50,000 a year in 2013 to just under $30,000 last year (2016), and this year my mortgage will be paid off which will drop my spending even further. Every couple of months, I take a look at my expenses and identify a new way to save money. It’s a fun mental exercise for me and it’s interesting to see what areas I’ve been able to optimize the most.
If you want to start tracking expenses online, you can easily create an account and start linking all of your accounts. It’s a great way to systematically track your expenses, as well as provide a comprehensive picture of your net worth.
Retirement – The Biggest Savings Goal
Saving for retirement is often the biggest savings goal people have, although we often don’t think about it much until we get close to our retirement date. Tracking your expenses ultimately helps you determine how much you need to save for retirement. Most experts recommend that you save 25 times your annual expenses for retirement. Therefore, when you can identify what your spending requirements will be for the future, you can easily calculate how much your retirement savings goal should be. For example, if you spend about $30,000 per year, you need to save at least $750,000 for retirement.
There are a few things that will more than likely dramatically vary your spending ability in retirement, including a reduction in income and potentially higher expenses. Health care is a big unknown in retirement, including possible long term care, assisted living, or various medical care that may be needed.
For most of us that have worked their entire life for someone else, income, taxes and medical insurance came from our employer. Retirement can be scary when both income and expenses are unpredictable.
Tracking your expenses not only gives you more control over your finances, it also helps you identify what is most important to you. After you add up everything you are spending in certain categories – groceries, eating out, entertainment, etc. – you will begin to make different choices. Your spending habits will change as you align your spending with your overall values, priorities, and goals.
Today, take charge of your finances, start a plan to track your expenses, and create new spending habits to reach your financial goals.
“Beware of little expenses. A small leak will sink a great ship.” ~Benjamin Franklin