Tracking your spending and expenses is the first step to building wealth. If you don’t know where your money is going, how are you going to direct that flow? It’s like playing darts with a blindfold on. You know you’re throwing the darts, but you have no idea where they’re ending up. When you track your spending it’s is like taking the blindfold off – all of a sudden you can see the where the darts (your money) is ending up, and make adjustments as necessary to reach your target.
To track your monthly spending, you need to follow three simple steps:
- Make a list of all money coming in
- Make a list of all money going out
- Categorize your transactions
That’s it. By incorporating those three steps you are taking the first stride towards building wealth. Now let’s expand on each step.
How to Start Tracking Your Spending
To get started, you need some way to keep track of all your lists. My personal recommendation is to use a spreadsheet software like Excel or Google Sheets, as this will make your analysis easier. You can also do it on a sheet of paper, but just know you’ll need a calculator handy.
At this point I’m assuming you haven’t been tracking your spending. If so, it’s going to take a bit of work upfront to get you started, but by putting systems in place, it’ll become much easier in the future. So decide how far back you’re going back. Ideally you’d be going back 6 months, but that is a lot of backlog to capture. Start with 3 months – this is short enough that it’s not too many transactions, but long enough that you can get averages. If you’ve been tracking already, you can build upon what you’ve been doing.
Lastly, open up all your banking accounts to get a listing of all your transactions. With more payment being done with cards, it’s a lot easier to keep track of everything than it used to be. If you’re someone who deals a lot in cash, that’s okay too. It just may entail some more guesswork as you capture your transactions.
Make a List of All Money Coming In
When building your financial picture, it’s crucial to start by baselining your income. Without knowing how much you’re bringing in, it’s hard to understand how you’re doing with your spending. Imagine you’re spending $3,000 a month. If you’re making $5,000 a month, you’re doing alright. But if you’re only making $2,500, then you’re headed for trouble.
So start by looking at all the income you’ve got coming in from the last three months. Include any salary, gig work, etc. You can also include any one-off influx’s (e.g. gifts, sale of an item), but I’d call those out separately as they aren’t as consistent (you can’t have your birthday every month). For each income, specify:
- Date
- Amount
- Description (e.g. bi-weekly paycheck)
Once you’ve got that all recorded, calculate how much income you had in each month. Now you can determine how much you typically have coming in for each month. If you have a lot of variability in your income, I’d recommend taking your worst month. By doing that, you’re planning for the worst case scenario, and any money that comes in over that amount will just be bonus.
Now that we’ve got a picture of how much money you’re bringing in, let’s switch focus to the outflows.
Make a List of All Money Going Out
As mentioned above, you can’t take control of your money until you are able to identify the flow. From there, you can direct it. Regardless of your financial situation, being in the driver’s seat of your financial life is crucial for building wealth.
Similar to what you’ve done with you income, make a list of all the outbound transactions from the last three months. Again, for each purchase you want to specify:
- Date
- Amount
- Description (i.e. what did you spend the money on?)
Leave space for two more columns as well – we’re going to use those in the next step. By doing this, you can now calculate how much you have spent in each of the last three months. Once you’ve got the monthly spending, take a moment to compare your spending to your income in each month. Did you bring in more than you spent? Did your spending exceed your income? Just knowing this can be eye-opening and useful in taking control of the flow.
From here, we’re going to categorize the spending across two characteristics.
Categorize Your Transactions
Now that you’ve got a listing of all your transactions, you can start to categorize. Categorizing allows you to get deeper in to the understanding of your spending, and can be used to inform future decisions. You’re going to classify your spending across two characteristics: Category, and Need/Want.
First, assign each transaction to a category. These categories can be as broad or specific as you’d like. If you go too broad it may be difficult to tease out meaningful information, whereas if you get too specific it adds extra work. At the least I’d call out categories such as: Rent/Mortgage, household expenses (e.g. cleaning supplies), groceries, restaurants/takeout, bars/alcohol, clothing, etc. Feel free to add additional categories that are relevant in your life. Now, go down the list of purchases and assign a category to each transaction.
Next, and this is the hardest step, designate each purchase as a need or a want. Needs represent things that you have no choice but to purchase, like groceries, rent, insurance, etc. Wants on the other hand represent things you can get away with not purchasing. For example, going out for dinner with friends, purchasing a pair of shoes you wanted, etc. These aren’t necessarily bad things, but they are things that represent decisions points.
Now there are cases where the item was something you needed, but could have gone cheaper. For example, you needed a new pair of shoes, but you didn’t need designer shoes. In these cases I’d designate it as a want for analysis purposes. I’d encourage you to be pretty harsh in this exercise. As I mentioned, wants aren’t necessarily bad, but by designating everything as a need you have less room for adjustment to your spending.
Analyze Your Spending
Now that you’ve got everything categorized, you can perform some analysis. Again, if you’ve done this in a spreadsheet software, it’s going to be easier, but it’s still possible on a piece of paper. Here are some things you can look at:
- How does my spending compare to my income? – If you’re spending more than your income on a regular basis, you’re going to end up in financial trouble (if you’re not already). Spending more than you’re making likely means you’re going to need to make some adjustments.
- How much am I spending across different categories? – Understanding where you’re spending your money allows you to target areas where you could cut back. For example, maybe you realize that you’ve been spending hundreds of dollars on take-out every month. This could be a wake-up call for you. This also is really helpful in putting together a budget.
- Of the spending designated as wants, what can I cut out? – Likely in your wants there are items that you could get away with not purchasing. By looking at all the items you’ve designated as a want, you can take a moment to think about whether that’s something you’d like to continue spending money on.
By recording all inputs, outputs, and categorizing your spending, you’ve taken off the blindfold. You can now see everywhere you’re spending money and start to direct that flow to align with your values.
Build a System to Track Your Spending
Now that you’ve done the work to track your spending over the last few months, it’s important that you put together a system to keep this going. There are three typical ways to do this, listed from least to most effective: Use your banking portal, use a software solution, and track using a spreadsheet.
Let Your Bank Track Your Spending
The first option is to use your banking portal. Depending on your bank, you can often get a high level view of the transactions and your banks best guess at the category. I would not recommend this approach for a handful of reasons. First off, you have very limited control over the categories, so you can’t break it up in a way that’s meaningful for you. Second, if your bank is anything like mine, you can only see this analysis this by account. Not only do I have multiple accounts at this bank, I also have accounts at other banks. So this provides a very incomplete picture. I do not think this is an effecting way to track your spending.
Use a Financial Tracking Software
The second way is to use a software. A common one I’ve seen is Mint by Intuit. Mint can hook up to all your accounts and consolidate all your information into one place. You can also categorize your spending as you see fit, and Mint will do its best to follow those categories moving forward. Mint can also be used to create and track budgets. Now some difficulties I have with Mint: First, the analytics are limited, and the information isn’t always presented how I like. Second, I’ve found that not all my accounts are able to be connected at this time. So it’s not a complete picture. That said, Mint is a great low effort solution, though not my favourite.
Track Your Spending Using a Spreadsheet
The last way, and my personal favourite, is to track your spending using a spreadsheet software. This allows you to quickly enter everything in and categorize/report how you like. With that said, as you likely noticed as you’ve gone through this initial process, it does take some work. I believe the work is worth the analysis it allows me to do, and once you’re practiced it becomes a lot quicker. By using a spreadsheet, I can quickly adjust categories, build out graphs based on different analysis points, etc. I find it provides a lot of flexibility.
Next Steps – Use Your Spending to Build A Budget
Now that you’ve got a picture of your spending patterns, this can be used to build a budget. You’ve got a decent picture of your average living expenses (e.g. groceries, housing, etc.), and a baseline of your other categories (e.g. eating out, clothing). Take advantage of this analysis to build a budget with spending goals for each category. Then, you can use the skills you’ve develop to track your spending to see how well you’re doing sticking to your budget.
Summary – Track your Spending
Now you know how you can quickly and easily track your spending. Tracking your spending can be used to inform your spending, and take control of your financial life. You can align your spending with your priorities, and not just mindlessly purchase what those around you are purchasing. And you can also leverage this to build a budget.
So if you haven’t already, take action! Open up a spreadsheet and get tracking. Take the first step towards building wealth, setting you up for further success.