Home > Money Management > Budget Basics #5 – Track Your Spending

Budget Basics #5 – Track Your Spending

Accurately accounting for how you spend your money is an important step in the budgeting process.  Incorrect information will make it difficult to alter your spending habits to better achieve your goals. 

If you are struggling to pay your bills and manage your finances, accounting for your spending is extremely important.  It can also be helpful even if you have plenty of money.  After seeing how much you spend for certain things, you may decide to modify your behavior and reallocate your finances towards something that is more important to you.

Here is a simple personal example.  I do not consider myself to be a connoisseur of coffee, but I like it.  Starbucks’ peppermint mocha latte is probably my favorite.  Cost… $4-5 a drink.  I usually only drink them when they are featured during Christmas.  I know I can get one any time, but the caffeine, sugar and fat content is too much for my diet to handle year-round.   If I drank one every day, it would add up to about $1,400-1,500 annually.  Alternatively, I can buy a 2.5lb bag of whole bean Starbucks coffee at Costco for $20, which lasts me 2-3 months drinking 2-3 cups per day.  Thus, I can feed my caffeine fix at home for about $100 a year.

I realize there is a time and ambiance factor.  It takes a few minutes to brew your own cup of joe, but it’s probably less time than waiting in line at most coffee shops in the morning.  Then there’s the ambiance.  There is something tantalizing about stepping through the doors of a coffee shop and smelling the aroma of a fresh brewed pot.  But for me, it’s not worth the extra $1,000 per year. 

This is simple example of why I think it’s important for you to track your spending.  Dropping $5 at Starbucks is not that big of a deal.  However, when you add it up over the course of a month or year, it turns into real dollars.  For me it’s brewing my own coffee, but it might be something different for you. 

Now that I’ve given you a bit of a rationale for tracking your expenses, here are a few pointers of how to do it.

Your bank and credit card statements will track a lot of things for you.  Checks, online banking and automatic bill payments will cover most of your major recurring expenses.  Your bank and credit card statements also record every time you swipe your debit or credit card.  One key point here – save your receipts.  While spending at some merchants will be obvious, others will not.  Wal-Mart, Costco and a number of other major supermarket chains also sell gas and medicine.  Receipts will allow you to differentiate whether you are spending on food, gas, clothing, medicine, gifts, etc.  Since your statements often come weeks after your purchases, it’s easy to forget what you bought on a particular day.

Although we continue to move towards a cashless economy, you may still pay for some items with cash.  You should have a system to track your cash expenses.  I would recommend an inexpensive application for your smart phone, or a pocket-size notebook that you can write down your expenses. Tracking your cash is very important if your budget is tight or you pay for a lot of things in cash.  Simply throwing all cash expenses under miscellaneous may not give you an accurate picture of where your money is going.  Cash is where a few dollars here and there add up to a significant amount over a month’s time. 

How detailed do you need to be?  There is no universal formula, but here is a quick rule of thumb.  If you thought it was important enough to create a category, then track spending for the category.   If not… what is the use of the category?  As you progress you may adjust your budget by condensing or expanding the categories.

Remember, the key to a budget is to help you make wise decisions.  Maintaining meticulous spending records that have no impact on your spending is a waste of time.  Conversely, improper tracking of your expenditures will distort the reality of where your money is going and hinder your ability to make good decisions.  In a nutshell… good information = good decisions.

After you have created a budget and tracked your expenses, now what?  Monitoring your spending.

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  1. August 2, 2010 at 5:53 PM

    Great site. A lot of useful information here. I’m sending it to some friends!

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