The Importance of Tracking Your Expenses

I have said it before , and I will say it again. Knowledge is power! If you do not know what is going on with your finances, you will have very little power to change them. The fact is, you can change your situation, but if you don’t know where your money is being spent, you will not know where to start making changes.

I want to give everyone an Excel spreadsheet I created (download by selecting this link). You can use it to start tracking your expenses. This spreadsheet is the same one we use to manage our money. You can also track your expenses by using desktop or online applications such as Quicken or Mint.com. Personally, I like to have everything in Excel, so I can play with the data and analyze it any way I want (but that is the accountant in me shining through). If you already own an application or tool for tracking expenses, and it works well for you, by all means, please use it instead. My goal is not to get everyone using my simple spreadsheet, but to get everyone involved and active in handling their finances.

Let’s Begin!

Step 1: Generate a list of categories that cover all your expenses.

Below are the ones I included in the spreadsheet I created:

•  Automotive - Gas
•  Automotive - Maintenance
• Automotive - Payment
• Clothes
• Communication - Internet
• Communication - Telephone
• Communication - TV
• Entertainment
• Food - Groceries
• Food - Out to Eat
• Giving - Donations
• Giving - Gifts
• Health & Beauty
• Income
• Insurance
• Kids
• Miscellaneous
• Other Debt Repayment
• Other Household Goods
• Pets
• Rent/Mortgage
• Utilities - Electric
• Utilities - Gas
• Utilities - Sanitation
• Utilities - Water
• Vacation

Step 2: Record all your transactions each month (going forward), and add a category, listed above, to each transaction.

Please keep in mind, if you are choosing to start tracking your finances, especially if you are doing so as a couple, you will need to cut yourself some slack for past transactions. What happened in the past is in the past. There is nothing you can do about it now, so try not to hold it against yourself or your partner. You are embarking on a new journey going forward, and that is what you need to keep your focus on.

Recording your transactions should be done for all purchases, whether you paid with cash, check, debit card, or credit card. The net impact on cash may not be exact if you are not paying off your credit card purchases in full each month. This method of tracking your expenses will give you a clearer picture of your spending habits. You will have to pay for the purchases eventually, so we will record them in the month the transaction occurred, rather than when you paid your credit card bill.

Step 3: Repeat every month.

It may take a few months to get a good idea of what your spending habits look like. Take 2 or 3 months to get the process down before setting your financial goals. In the meantime, try cutting costs on food, gifts, and hobbies as I described in earlier posts.

Step 4: Re-evaluate your spending habits.

Now that you have tracked your expenses for a couple months, you can begin to pinpoint the problem areas. Begin by asking yourself these questions:

•  Are you spending more than you are earning?
• How much are your food costs per week?
• Of your total food costs, what percentages are for groceries and dining out?
• Of your total income, what percentage is for your rent or mortgage?
• Are there any categories that seem excessively high (clothes, entertainment, cell phone, etc.)?

These are just a few basic questions to ask. On the Monthly Comparison tab on the spreadsheet I created, I have added calculations so you can track your progress in these areas as you continue on this journey.

Step 5: Set goals.

Goals should be measurable and attainable.

•  Measurable: Set goals in which you can easily track your progress.
• Attainable: Smaller, realistic goals will lead to success and will encourage you to continue. If you set goals that are unattainable, you may fail and want to quit.

It’s time to set your goals.

• Do you want to save money to pay down debt?
• Do you want to save money for retirement?
• Do you want to save money for your child’s wedding?
• Do you want to save money to take a vacation?
• Do you want to cut your expenses enough so you can live on one income?
• Do you want to create an emergency fund?

I encourage you to write down your goals. Doing this will help keep you accountable. Be sure to discuss these goals with your partner because you will be much more successful if you are working as a team.

Step 6: Devise a plan to achieve your goals.

Say you want to save $150/month. First, look at the categories in which you overspend.

Chances are, you are spending too much on food. Even eating a fancy meal at home is going to be much cheaper than going out to eat. Start by eating out less often. Remember, your goals need to be attainable in order to be achievable.

How about your cell phone bill? Do you really need all the bells and whistles and the latest and greatest phone? Most cell phone providers offer a value plan that does not provide you with a new phone every two years, but is significantly cheaper per month. If you are ok with using the same phone for more than two years, you may want to check this out.

What about TV? Do you really need satellite or HD Cable? You can pick up a high-quality HD antenna from Amazon for about $55. We bought this antenna, and it works great for us. Within a month or so, dropping cable and switching to an HD antenna, will pay for the HD antenna. Once the antenna is paid off, you can use the saved money to work on one of the goals you set in step 5.

If you follow these steps, you will be on your way towards having control over your finances. I will continue posting ideas for ways to save money on everyday spending. Please, let me know if you have any questions by posting a comment or emailing me at Eva.Bender.CPA@gmail.com.