One of the important habits that you need to have is to learn how to track your expenses effectively. Some people think that this is a very tedious job to do. Well, they are not wrong. We do spend a lot on a daily basis. In fact, most of us enjoy spending because it is easier to do than other options like saving. It is just something that we are so used to doing.
This has something to do with the fact that we live in a consumerist society. We are required to pay for goods and services that will allow us to survive and thrive on a daily basis. Money is needed for gas or public transport. We need to pay for food. Clothing, shelter and the most basic of necessities require payment. All of these should be tracked – at least if you want to be a responsible manager of your finances.
According to statistics, Americans are not confident with their financial knowledge. This is compromising their ability to manage their money properly. The truth is, financial management does not require a rocket scientist. You just have to know and understand your own financial activities for you to be able to make the right decisions about your money. To have this understanding, you need to start tracking your expenses first.
Step by step guide to tracking your expenses
As mentioned, this can be a tedious task. But it is something that you cannot skip. There is no shortcut to this because you need to analyze all the expenses that you make so you can understand your spending behavior. The good news is, you do not have to do this all the time. Once you have analyzed your current spending patterns, you can create a realistic budget plan. It will already give you the data that you need to correct any mistakes that could have been compromising your financial position.
While it is tedious, the steps to track your expenses are actually quite simple. You just have to take the time to get to know the steps. According to a survey, 75% of those who are not tracking their expenses said it is because they do not know where to start.
Well here are the simple steps that you need to follow if you want to successfully track every little expense that you make.
Have somewhere to track expenses
Start by choosing how you will track your expenses. Some people feel more comfortable using a traditional pen and paper. Others find it more convenient to use their smartphone. There are a lot of apps that you can use to help you take note of your every expense. This will help you reconcile it with your budget – or help you create one if you still do not have it.
Record every expense for a month
Once you have decided on how you will track the expenses, it is now time to commit to tracking what you have written in your notebook or encoded it in your app. You have to be dedicated to doing this for a month. This will give you a clear picture of your spending habits. Even the small expenses should be recorded. Do not overlook the small ones because when they add up, you might be surprised at how much these expenses cost you.
Categorize the expenses
You should do this on the first day that you track your expenses. For instance, you can set up categories for food, clothing, transportation, rent, utilities, etc. It all depends on what you spend on a monthly basis. As you track every expense, you can organize them under the appropriate category. That way, you can see the total for every category. This will help you identify what categories you are spending too much or too little on.
Set a budget for every category
In the midst of your tracking, you should analyze your income and calculate how much you should budget for every category. This is how your tracking efforts will eventually keep you from overspending. The budget will be your spending limit. When you reach this limit, you are no longer allowed to spend more in that category.
Compare the spending limit with the tracked expenses
This should happen at the end of the month. You should have a near-accurate account of what you spend on each month. You will them take the budget for every category and compare it with the actual amount that you are spending. If you are overspending, you can check what expenses can be removed. You need to identify these so you will know how you can control yourself.
Stick to your spending budget
When you track your expenses, it is important to realize that this is a never-ending task. Well, the tedious tracking is. But you still need to monitor your budget and actual spending. It is very important that you stick to your budget. This is how you will start to improve your financial position. This habit of yours will keep you in full control of your finances and will help you make the right decision to take your net worth to the next level.
As you can see, the whole purpose of tracking your expenses is to ensure that you will not spend more than you intended. According to statistics, Americans usually find themselves spending more than what is necessary – usually with no intention of doing so. Once you have developed the habit of tracking your spending, this will no longer be a problem for you.
What to do with the extra money after tracking
Now that you know how to track your expenses, how exactly will it translate to the improvement of your finances? The key is to make sure you have extra money left over after all the expenses are paid off. Even if you have a tight budget, you can still end up with extra money as long as you track your expenses effectively.
But once you have the extra money already, what can you do with it? There are three things that you can do.
Pay off debt
If you have a lot of debts, you can pay off the debts that you owe. Make bigger payments towards the debt with high-interest rates and those that do not have pre-payment penalties. Although the money is not really going to your savings account, you are saving by eliminating the high-interest that is being added to your debt. That is actually a different form of savings already.
If you do not have an emergency fund or you have something that you want to buy in the future, you can put the extra money in a savings account. If you want to buy a house, save up for a down payment. You need at least 20% of the selling price of the house.
In case you already have adequate emergency fund and there is nothing for you to save up for, you can invest the money that you freed up as you track your expenses. When you invest your money, you will give it the chance to grow significantly.
You do not have to do all three – but if your finances can handle it, you should try to do as much as you can. The more you can accomplish on these three, the more improvement you can expect from your personal finances.