You may have noticed that we didn’t post an “Everything We Spent in 2017” post this year. That’s because we did a terrible job tracking our spending last year. In addition to losing a lot of my personal financial habits, we also stopped deliberately tracking our spending, categorizing our credit card purchases, and creating our usual financial projections. Mostly because we were overwhelmed with moving and business-ing. And yes, I feel quite ashamed…because tracking your spending is the bomb! Seriously. It’s not glamorous, but it will LITERALLY CHANGE YOUR LIFE. It is one simple action that by itself will lead to positive changes in your finances and your outlook on life.
Why You Should Track Your Spending -or- Knowledge is Power
There are many different puzzle pieces to personal finance, but the number one most important first step before all else forever and ever amen is knowing Where. Your. Money. Is. Going. What are you spending money on? How much is your rent? How much gas do you buy a month? How many coffees? How many ice cream cones? How much for groceries?
Tracking your spending answers these essential questions! When you’ve tracked your spending for a month or more you can look back at your numbers and identify trends, track patterns, and put a REAL dollar figure on your coffee/manicure/carwashing/escape room habit. I will warn you though – you will learn things about yourself that you never knew (and perhaps didn’t want to know!). The numbers don’t lie and looking at your spending very clearly illustrates your choices and habits and what you value. You will be surprised (we always are!), and you can't hide from yourself.
For example, we believe that we go out to eat infrequently. But several times when tracking our spending we’ve realized that a ‘few’ times eating out weren’t actually that few, and that we may need to stop eating out for a while in order to meet our goals. Also, the first year we tracked our spending we were SHOCKED at how much we were spending just on commuting to work. Because of that, we moved closer to work as soon as we could.
There are three primary benefits of looking at this big picture data:
- Align Spending with Values: Seeing these numbers gives us the power to evaluate whether our spending is actually in line with our values, or whether we are overlooking larger goals in favor of short term desires.
- Getting the Best Deal: Sometimes, looking at our spending makes us realize that the issue is not short-term desires vs larger goals, but just that we need to find a better deal: maybe our spending on cell phones, transportation, or insurance deserves a second look to make sure we are getting our money’s worth. By looking closely at expenses in certain categories, I can find ways to get better value for my money. For example, we switched cell phone carriers to Republic Wireless (and then Google Fi) to save hundreds of dollars a year.
- Setting Up Long-Term Goals: Seeing the big picture also allows us to analyze how to meet long-term goals. We knew we wanted save up a good portion of money before we moved back to Indiana from the DC area. By looking at previous years’ tracking documents we understood our income, expenses, and how they might change in a different housing market, and were able to forecast when we would feel comfortable moving (potentially leaving our jobs behind). It also enabled us to get a better grasp on how much we would be willing to pay for a home after we moved to Indiana.
Perhaps even more importantly, tracking your spending just gets you to spend time with your finances. The very act of looking at your spending will change your spending, even without having the data to look at the big picture. Being familiar with your own (realistic) spending numbers helps you make the best choices for your current life (not your dream life, or your past life, but what you need right now).
How to Track Spending -or- Putting Your Ducks in a Row
Tracking your spending involves two steps: creating a list of all your expenditures, and dividing them into meaningful categories.
- Write down all your transactions. Every dollar you spend online, by credit card, by check, or by cash needs to be recorded. Every cup of coffee, Girl Scout cookie, and vending machine dollar should be written down. (This can get annoying, but there are some easy tools to help with this.)
- Find all your money. I love automatic bill pay, but this often means that I am automatically spending money each month that I never see. Do you have a subscription to Hulu/Netflix/Audible/Hello Fresh/Stitch Fix/etc.? Are you billed a different amount for your phone each month? Don’t forget to write those costs down as well.
- Divide your money into meaningful categories. Having a grand total of how much you spend each month can be extremely useful (see above), but it won’t tell you if you are over-spending on fancy cheeses or under-spending on home maintenance. Write down a list of categories that fit your lifestyle and then place each transaction in one of those categories. For example, the categories we use include: rent, transportation, charity, groceries, shopping, travel, medical premiums, utilities, gifts, health, restaurants, fees and charges, cell phone, entertainment, and pets.
None of these steps to tracking your spending are difficult, but they can be a bit boring to do by hand...luckily, there are multiple tools that help automate this process.
Mint is probably the best-known website/app for personal finance, and for good reason. Mint links to and aggregates all your accounts - banking, checking, credit cards, investments. Then Mint will automatically categorize your expenses and income and create a multitude of expense reports. Mint allows you to create budgets and goals for yourself so you can see how your spending and saving compares with your plans - over, under, or right on track. If you link all your accounts, it also will show you the big picture of your net worth. Overall, Mint is a very versatile tool, and comes at the right price of $0. Mint makes its money instead by offering ‘suggestions’ of credit cards, loans, etc, that are essentially targeted advertisements. Some of those suggestions can indeed be helpful, but always do your own research and don’t assume Mint’s suggestions are actually your best possible deal.
Personal Capital is similar to Mint, but focuses more on investing. It essentially offers the same tools and capabilities, but with greater analytical tools of your investments. These can be quite helpful if you have your investments spread across multiple accounts or don’t have a clear picture of what you are invested in. However, I didn’t find its automatic categorizations to be as good as Mint; they required more corrections and manual input. Personal Capital also comes at the great price of $0, but it makes its money a different way - its free tool is essentially an advertisement/gateway for their investment advisors. It’s not a hard sell (the occasional email or phone call that I’ve easily avoided), but my understanding is that Personal Capital’s investment advisors charge a relatively hefty fee, so I recommend sticking to the free tool and not getting sucked into using their investment advisors.
You Need a Budget (YNAB)
You Need A Budget (YNAB) is an online (or app-based) tool focused on budgeting. It is probably the best tool out there for people who could use some extra help with tracking and budgeting and are willing to spend some time on it. In addition to automatically importing expenses from your linked accounts, it also offers a detailed, user-friendly experience in setting up your budget. It doesn’t have the same automatic categorization features that Mint has, but that isn’t necessarily bad - it will remember the category from the last time you used that merchant, and the need to categorise/approve every transaction will keep you thinking about your spending. The most unique feature about YNAB is its requirement for you to budget every dollar of income. Although this does require more time, fulfilling this requirement will result in a robust budget that will help you hold yourself accountable. YNAB also offers a multitude of free classes on both budgeting and personal finance generally and the finer points of how to use its product.
Unfortunately, it is also the only tool on this list that costs money - $6.99 a month (or $83.99 a year). That being said, YNAB says the average user saves over $6,000 in their first year using YNAB, and I believe it. Mind you, I think tracking your spending another route will also likely save you over $6,000, but if you aren’t going to be successful doing it on your own, then have the foresight to invest $84 on YNAB. (Also, the first 34 days of YNAB is free and students get one free year, and they offer a money-back guarantee after that, so the giving it a try can’t really go wrong…)
This method involves using a spreadsheet software such as Excel or Google Sheets and manually inputting all your expenses every time you spend money. This method takes more time both to set up (in order to create categories and automatic reports) and to use on a day-to-day basis (because you have to input all your expenses). It is, however, free and can be designed precisely to your heart’s content. For an example, see Pretend to be Poor’s spreadsheet described in this post: http://www.pretendtobepoor.com/grownup-checklist/
A ledger is essentially the hand-written version of a spreadsheet. Simple, but more work. This is the best option if you don’t like computers or don’t care to learn how to use a spreadsheet.
Our Tracking Choices
Of all the options, we like Mint the best. It has all the tools we really need, is free, and has the best automatic categorizations. Personal Capital is probably better for people who have investments spread across multiple accounts and need help analyzing those, but it is a bit more time-intensive due to its inferior categorization feature. We recommend YNAB for people who are interested in getting help going deeper or need to more closely monitor their budget (paycheck-to-paycheck). YNAB is worth the investment of both time and money, partially because they offer better customer support and education.
That being said, all the online tools we have used sometimes have trouble automatically connecting to my accounts, which can be a frustrating experience. With that in mind, using a spreadsheet, although it takes more time on a day-to-day basis, would be a more 100% reliable and consistent system - but you have to be diligent on your own. The daily use required with the spreadsheet method would also be valuable in keeping spending goals at the front of one’s mind. Overall, paper ledgers are definitely the most cumbersome, but that being said - if you are the most comfortable with a paper ledger, then go for it!
The Tricky Parts of Tracking Your Spending
There are a couple tricky parts to tracking spending that we want to mention: work-reimbursed expenses and pre-tax expenses. For work-reimbursed expenses, we suggest paying for them all on a separate credit card. That card and associated transactions can then be ignored in whatever tracking method you use.
Pre-tax expenses are a bit more difficult - they should be included in your analysis, but most tools can’t pick them up for you. For those expenses, we usually review them once or twice a year, and include those expenses in a spreadsheet with information we’ve copied over from Mint. As these expenses are usually pretty stable, they generally don’t need to be reviewed that often, but it is worthwhile to review them occasionally, as the best option for health insurance may change year-to-year.
There's a lot to talk about with tracking your spending, but the best way to start is to just jump in. Explore these tracking tools, start saving receipts, or jot down what you are purchasing each day (both in person and online) and keep a running total. Whatever strategy you choose, it will be a voyage of (self) discovery!!