When it comes to personal finance, creating a budget is possibly the most common advice that you’ll hear or read. While creating a budget is a great step towards getting control over your money, I’d argue that tracking your expenses is an equally important step.
In this article, we’ll look at the different ways you can do it (including apps) and the steps you can take when you are ready to track your expenses.
Tracking your expenses isn’t hard and it doesn’t require that much time, but it does take some effort and the dedication to actually do it. The benefits though are well worth the small effort.
Ways to Track Your Expenses
Let’s look at the different options for putting it into practice.
My favorite approach to tracking expenses is to use a simple spreadsheet. You can use Google Docs, Excel, OpenOffice or any other program that you prefer. All you need to do is create the spreadsheet and enter your expenses each day.
Create columns for things like the item or service you purchased, date, location/store/website where you purchased, category, and the dollar amount. At the end of the month, or at any time during the month, you can check the overall total, as well as the subtotal for any category.
I prefer using a spreadsheet because it’s quick and easy. I’m on the computer every day, so the effort is minimal.
2. Budgeting App
There are a number of web and mobile apps that have been created specifically for the purpose of budgeting. Most budgeting apps will also allow you to track your expenses. Sometimes this is done automatically by linking it to your credit card, but you’ll need to manually enter some expenses.
You should also check any expenses that are pulled into the app automatically to make sure that they are accurate and being applied to the right category.
The leading free apps include:
Personal Capital is my favorite financial app. It does include some expense tracking capabilities, but my favorite aspect of Personal Capital is the net worth tracking. If you want to try Personal Capital (it’s free) you can get a $20 Amazon gift card as soon as you link at least one financial account to the app. Sign up through this link to qualify for the bonus.
(I love Personal Capital, but if your intent is to use an app strictly for budgeting, Mint or EveryDollar would be a better choice. Personal Capital’s expense tracking features are not as good as it’s net worth tracking and investment reporting capabilities. If you’re looking for a great financial dashboard, try Personal Capital.)
3. Pencil and Paper
Another option is to simply record your expenses on paper. I like to use a spreadsheet because I’d probably lose the paper. Also, I can save month’s and year’s worth of history in a spreadsheet or within a folder on my computer. Spreadsheets will also do the calculations for you. But if you prefer, a paper version is an option. Some people like to use a bullet journal for this purpose.
Another option is to record your expenses each day on paper, and then enter them weekly or monthly into a spreadsheet.
Steps to Tracking Your Expenses
Now, let’s get into the steps that you can take to actually record and track your expenses.
Step 1: Choose Your Approach
First, decide how you are going to be tracking expenses. Do you want to use a spreadsheet, an app, or pen and paper?
There is no right or wrong approach, just choose the option that will be the best fit for you.
THIS IS IMPORTANT because you’ll need to stick with it in order for this exercise to do you any good. Choose whichever option you will be most likely to do on a daily basis.
Step 2: Create Categories
Part of tracking and analyzing your expenses will involve seeing the totals for different categories (like groceries, utilities, clothes, gas, debt payments etc.). Each time you enter an expense you should be assigning it to a category.
If you’re not sure what categories to include or how you should organize them, see this list of budget categories. Not all of them will apply to you, but you can choose the ones that do apply to you and it will give you a great start.
Step 3: Create Your Budget
Creating a budget and tracking expenses go hand-in-hand. You can either create your budget first and then track your expenses, or track your expenses for a while before creating your budget.
Personally, I think it’s helpful to track your expenses for a month before creating a budget because it helps you to create a more realistic budget. If you’ve never tracked expenses in the past, you’re really just guessing when you’re creating a budget. Some of the numbers may be very unrealistic.
However, you can create a more accurate budget right away by going back and looking at your expenses from the past month (or the past couple of months). Check your credit card statements, bank statements, and try to recall any cash purchases.
→ Related reading: 13 Things You Can Do Today to Improve Your Finances
Step 4: Record Expenses Every Day
The most critical step is to record the expenses every single day. If you don’t do it every day, you’re likely to forget. This is especially true for cash purchases because they don’t leave a paper trail (unless you keep receipts for everything).
Get in the habit or recording expenses each day and it will become second nature. For me, the best time is the evening, after I’m done with any expenses that will be made that day.
Step 5: Check Your Statements
At the end of the month, check your credit card and bank statements. Make sure that all purchases have been recorded. You probably have subscriptions and auto payments set up, and it’s easy to forget these if you’re not checking your statements.
If you’re recording expenses daily and you’re going back to check your statements at the end of the month, you should be catching everything and no expenses should be slipping through the cracks.
→ Related reading: 40 Smart Ways to Reduce Your Monthly Bills
Step 6: Adjust Your Budget as Needed
After you track your expenses for a while, you’ll probably need to adjust your budget. The budget should be fluid, so be willing to change it as needed. You can increase or decrease categories as needed, but be aware of the impact those changes have on your overall budget.
If your expenses in a particular category are going over budget every single month, you need to either increase the amount you’re budgeting for that category or find ways to reduce the expenses.
Step 7: Don’t Forget to Budget for Savings
Your budget should include a category for saving or investing. Don’t create your budget to spend all of your money and just hope that there is something left over at the end of the month to save. Make saving and investing an important part of your budget and decide how much you are going to set aside each month.
If you’re saving money each month, don’t put it in a bank account with a low-interest rate. CIT Bank is a great place to keep your savings, and they pay an interest rate that is 20x the national average! My wife and I have savings accounts and money market accounts with CIT and I highly recommend them.
An Alternative: The Cash Envelope System
One alternative to tracking expenses is to use the cash envelope system popularized by Dave Ramsey. With this approach, you’ll pay for everything with cash and you’ll have an envelope for each category in your budget. At the beginning of each month or pay period, you’ll fill the envelope with the amount of cash budgeted for that category. As you make purchases, you’ll remove and use cash from the appropriate envelopes.
If you use cash for everything, you can know how much you’ve spent in each category by simply subtracting the amount of cash that is still in the envelope at the end of the month or pay period.
The challenge here it’s nearly impossible to make all of your purchases with cash. Even if you don’t use a credit card, you’ll probably still use a debit card for some things. So you’ll at least need to go back and look at your checking account statements for any purchases that weren’t made with cash.
→ Related reading: Best Cash Envelope System Wallets
Put it Into Practice
Regardless of which method you choose, be sure that you make the small effort to actually track your expenses.