Do you know where your money goes? Do you really know where your money goes? This isn’t a segue to dive into some asinine conspiracy theory, but I would say that a lot of people don’t actually know where their hard-earned money goes.
I’m going to admit that when I dive deep into my expenses, I find surprises every time. I’ll also admit that I don’t track my expenses daily but in batches typically quarterly though I am going to shift over to a monthly review based on the fact we’re now a single income family.
I just completed a review of how I track my expenses and the expenses themselves and I have to say I was more than a little surprised. Since the beginning of the year, we’re been spending almost 25% more than I was expecting on groceries of all things. This really caught me off guard because while we’ve been home more it didn’t feel like we were spending more.
The exercise did remind me just how important keeping track of your expenses is.
I would say that it’s the foundation of personal finance, if you don’t actually know where your money goes how can you get ahead of overspending? As I thought about it more and more things came to mind that needed a very clear understanding of where your money goes:
- Long term planning
- Reducing financial stress
- And many more…
You can try all of those things, but I can’t imagine you’ll be any more relaxed if you’re barely living paycheck to paycheck and you don’t understand why it’s so hard. Personal finance at its core is math, it follows rules. If you understand the basics of where your money goes you have a great starting point to get the math right.
The concept – What is expense tracking?
This is simply tracking all of the money coming in and out of your accounts, get to the details of the data. Yes, it can be boring and tedious but if you don’t do it then you’re operating on gut feel. I thought we were spending less on groceries than we were; I’m also the one who buys our groceries so I should have known – right?. It’s easy to think you’re spending less or even more, than you are, it’s the hard numbers that are important.
The basic idea is to track all of your money coming in or out and to categorize it. This is done with the transactions that your bank records for you from your paycheck to the grocery run (assuming you pay with a debit card). If you exclusively use cash, then you’re on the hook for tracking everything. The reason for categorizing your spending is it’s important to know how much you spend on groceries vs the car especially when it comes to more spread-out one-off expenses.
The good news is while expense tracking can be tedious. There are tools that can make the whole process a bit easier.
There are a variety of tools you can use to track your expenses from writing them down on a piece of paper to Excel spreadsheets or Google sheets, all the way through to software that is designed for it. The challenging part is you have to find something that works for you, there is no one size fits all
Pen and Paper – some people just like the traditional paper approach and there’s absolutely nothing wrong with it. When I started tracking my expenses (many years ago) I tracked with a little paper pad and then moved to Excel. Note: the pen and paper approach works well if you’re spending cash a lot.
Excel or Google Sheets – a more sophisticated approach is using a tool like sheets or Excel. They provide a lot of functionality in a pretty standardized format; they make things like calculations and categorization that much easier. The nice thing is a lot of banks allow you to download your transactions and they even help categorize love them making the process easier
Online tracking tools – the next step up is using an online tool specifically designed to help track and tabulate your finances. I use Intuit’s called Mint and I’ve been using it for years. The idea is to take the spreadsheet functionality one step further and connect through to your bank. I’m not familiar with too many of the online tools especially since a lot of banks offer their own. If you’re comfortable with this many of these tools can simplify and streamline expense tracking in a pretty automated way.
Software – while online tools are essentially software some people still cautious using web-based tools for their finances. Desktop software like QuickBooks offers most of the same functionality and again I am sure there are lots of options to choose from. Personally, I’m comfortable with online tools and Excel but if I see any good reviews, I’ll post those up.
My Approach to Expense Tracking
At the end of the day you want to be able to track all your spending and there are numerous ways to make this work, so I thought the easiest is to share my approach. In the past, I’ve been a bit laxer with the timing of my tracking going into more detail every 3-6 months and definitely in advance of tax time so I know what happened to my money.
I start off by getting a consolidated view of my accounts from Mint and export all my transactions to excel. I know Mint has a lot of tracking and categorization built into it, but I like digging into the data and categorizing things my way. Then I cross-check that everything makes sense and that nothing was missed (occasionally things get missed).
Once I have the transactions, I make sure the categorization is the way I want it. My spreadsheet breaks everything down and I have a single view at the monthly level. I like this single view because I can see where my money is going from month to month.
Finally, as I’m going through transactions there’s are some that span multiple categories which I break up into multiple lines. The classic example is Walmart, we buy some of our groceries there but at the same time, we can buy clothes on the same trip. If I have the receipt, I break up the single into multiple lines and categories. I know this sounds like it’s a lot of work but really there’s only a handful of stores that this applies to. For me, this makes the consolidated view more accurate which I like.
What if I stop or pause? – you can always pick it up
The more frequently you go through an exercise like this or use a tool like Mint to its full capability it becomes an early warning to alert you of changing patterns or overspending. But even if you do this quarterly it still adds benefit and you can always pick things up and restart. Find a balance that works for you but more frequently the better, I’m going to be moving to monthly tracking and review.
What’s next – Analysis
The main reason this is extremely important is that in the details you realize just how much you’re really spending on something and not how much you think you are. The current example is seeing my grocery spending was about 25% more than I was expecting, in the past it was things like restaurants or even gas that surprised me. Things change over time as do prices and this approach allows you to see patterns.
Once you know where your money is going you have the means to build a realistic budget or to adjust your spending so that you can more comfortably live within your means. Now that I have my data and tracking current, I’m going to review and assess, and we’ll cover that next step in another post.
What do you do for your expense tracking? What online tools do you recommend?