Financial Tip Friday: Want FI? Track Your Spending

Financial Tip Friday: Want FI? Track Your Spending

This is an updated post of an older one, but I think one that needs to be repeated. In my opinion, the very first step toward getting your house in order is to figure out where your money is going which means you should being by:  TRACKING YOUR SPENDING!

Not the Same As Budgeting

Tracking your spending is not the same as budgeting. I am not asking, initially, for you to take every dollar you earn, give it is a specific name and stick within that budget. I think that everyone should have a budget or some semblance of it so your money doesn’t go out of control, but tracking your spending is merely keeping track of where your money goes.

Use Free Software to Track Your Spending

A good chunk of the population if not most use a debit card or credit card for most of their purchases. Sometimes we use cash for small things, but most of the transactions people make are automatic withdrawals or debit/credit card purchases. There are plenty of programs out there that allow you to link your bank accounts, credit cards, investments, etc and it will keep track of your spending for you. I personally use Mint.com to track my spending. It is FREE and easy to set up. You just have to take a little time and link your accounts with the Mint site.

Then at least once a week you should go into your mint account and categorize your transactions. Again, fairly easy to do. They have default categories for you. You can add your own category for odd/different expenses (e.g. license renewal tabs or something like that).

You can also use Mint or other sites to budget if you would like, but the point is to start tracking your spending and seeing where it goes.

What About Cash Transactions?

This is probably the biggest problem with tracking your spending. What do you do about cash transactions? Do I just track how much cash I take out each week? Do I get a receipt for every purchase, including that $1 cup of coffee I had yesterday? What about if just like to live on cash?

My answer to each of those questions is it kind of depends. I mean if you want to really truly track your spending to get a hold of it, budget, see where it is going, particularly if you are not sure, then YES you should save every receipt, write it down on a notebook,i piece of paper, whatever, daily and then add those items up at the end of the week/month. I mean if you really want to track your spending hardcore…then you should truly track your spending. This is especially true if all of your purchases are with cash.

If that is the case then you really should save all your receipts. Because you might not know where all your money goes.

However, if we are taking a small amount every week (e.g. $20 or something) for items like a cup of coffee, soda, lunch out, whatever it is, I might recommend you just create a miscellaneous category for those small cash transactions and call it that.

Now if you taking out hundreds and thousands of dollars every month for going out to eat, gas, going to the bar, etc, then I think you need to switch your habits to using a debit card or really have better record keeping.

Advantage 1: You Know Where Your Money Is Going

A common refrain from people is that they have NO idea where all of their money goes. It comes in, goes out, and then people can’t understand where they spent everything. Personally, i think if you are serious about getting your finances in order then it is important to know where our money goes. Some of us might not WANT to know. We are happy in ignorant bliss, but that isn’t really realistic.

Tracking your spending allows you to take greater control of your money and then you can determine what you really want/should spend your money on.

Advantage 2: You Can Calculate Future Needs

Another common refrain that I hear is that I can’t track my spending because each month is different and I have different expenses each month so there is no point. I say HOGWASH! Yes, there are different expenses that come up. God forbid you go to the hospital or get a traffic ticket or whatever. But I am not talking about budgeting yet. I am talking about seeing where your money goes.

And let’s be honest most of the expenses we have each month are pretty much known to us. We know how much our rent/mortgage is, car payment, loan payment, how much we might spend in gas, childcare, etc. Those expenses typically don’t fluctuate all that much. They are consistent throughout. So the bulk of spending is something that you can track.

Once you track your spending you can then calculate for future needs. For example, let’s say you want to retire. The big question is how much money do you need? Well, a lot of it is probably your expenses. How much does it take each month for you to live your life? Depending on what the answer is what you probably need to save in order to retire.

Now there are different calculations for that number, which is something we will talk about later. But understanding those basic expenses allow you to make better judgments on how much you need in financial independence, early retirement, etc.

Advantage 3: It Doesn’t Take Much Spending to Have the Good Life

Many people have dreams and aspirations of traveling the world, buying fancy cars, homes, etc in their lifetime. I fully admit I have had similar dreams, but for the vast majority of us, particularly as time goes along, those kinds of things aren’t really important. Most of our spending is going to be fixed expenses (e.g. mortgage, etc). What most people are concerned about is how much money can I have/need to live a “good life.” Maybe that money is to buy books, join a country club, play a lot of golf, travel, etc. When you strip out all of the fixed expenses you come to realize that most of our spending isn’t for extravagant things, but normal stuff. The small pleasure of a cup of coffee, a drink with friends, a new outfit once in a while. These are the things that animate our lives.

I am not saying that you shouldn’t and can’t have more, but the things that really make life worthwhile (duh) are family, friends, sharing your lives with others, being social. Things that don’t have a price tag. When it comes down to it you don’t need a lot of money to be social, unless you are a New York socialite. But for the most part that isn’t the case. It probably only takes a few hundred dollars a month (maybe less) for you to really have the “good life” that you enjoy, which is for most of us being surrounded by the people that love us and we want to be with.

Thus, by tracking your spending you can realize what you might want to spend to have a bit more of the “good life” or maybe you are having too much. Maybe it is time to scale back because of other commitments.

The Bottom Line

The bottom line is this; tracking your spending is really important to getting your finances under control, build wealth, or achieve your goals. Even if you aren’t into accumulating wealth, tracking your spending will allow you to determine how much money you need to live the kind of life you want.

You need to put a little bit of elbow grease into tracking your spending initially, but with free software on the web, an excel program, or a good old fashioned pen and paper you can see where your money is going and then adjust your life accordingly. Taking control of your money, knowing where it is going is the FIRST step towards financial independence.

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