How DO you track every penny you spend?
It seems clear that the more complex a system gets -- the more detailed the tracking -- the more likely it is to break down.
This post comes from J.D. Roth at partner blog Get Rich Slowly.
It's tough to dig out of debt (or make other changes to your spending habits) if you don't know where your money goes. I tried for years to turn things around, but was unsuccessful until I started tracking every penny I spent.
Armed with info about my actual spending habits (instead of perceived patterns), I was able to make a realistic budget.
But getting started with expense tracking can be overwhelming. There's so much data! Where do you begin? That's what Crystal wants to know. She writes:
I'm a little confused. How do you track every penny you spend? Isn't that what receipts are for? I'm confused (or maybe I'm over-thinking it). Let me explain.
Say I stop at a gas station and spend $30 on gas, $2.15 for a Red Bull, and $4.10 for a gas treatment. My receipt already says that, so why rewrite it?
Or at the grocery store, what do you do here? $X on dairy, $X on meat, $X on lunch stuff, and so on? Do I count eating with co-workers as networking? What about fast food that I buy because I'm too lazy to cook? Should this be lumped into the food category or separated out?
How do you actually track your spending? Could you or your readers share some examples?
Note: Crystal isn't asking about which tools we use to track our spending. Thank goodness! We've covered that many times in the past. This question is about the actual process of expense tracking.
This is yet another question for which there's no one right answer. Different people need to track their spending in different ways. That said, I can offer some general guidelines.
First, a tracking system is effective only if you actually use it. You can design the greatest tracking system in the world, and it doesn't matter a whit if you never enter your expenses. Because of this, you need to do what works for you. By that, I mean that Crystal should try a system that seems promising and if that doesn't work, try something else. Don't give up if the first method doesn't work. There's always another method that might do the trick.
From talking with Get Rich Slowly readers, it seems clear that the more complex a system gets -- the more detailed the tracking -- the more likely it is to break down. I've certainly found this to be true in my own life.
I like the idea of breaking my food category into subcategories like:
- Junk food.
In reality, though, tracking this level of detail makes my head hurt. It makes me not want to do my finances. Instead, I track just two food categories: groceries and dining out. That's enough detail for me to spot trends and to make changes. By tracking only a couple dozen categories, I'm able to spot trouble without being overwhelmed by unimportant stuff.
This leads us to the cardinal rule of expense tracking: Track the stuff that matters. Decide which categories you need the most information about and track them. For me, that means tracking how much money goes to books and comic books. I know these are my weak spots, so I have to monitor myself. Each person will track different categories.
- If you don't care how much you spend on books, don't have a separate category for them. Lump them into your general entertainment category.
- But if you want more detail about a category, create a subcategory. For instance, you might want to know how much you're spending on iTunes. If so, create an iTunes subcategory in your entertainment category.
In general, it's best to start with broad categories and add detail as needed.
It's also important to record your expenses often. If you set aside a few minutes every day (or maybe half an hour every weekend), it's vastly easier to track your spending than if you have to tackle the task only once a month. In my own case, I've found it's best to designate an hour a week for "doing my finances." In this time, I record the week's transactions and pay my bills. This is what works for me.
Lastly: Why doesn't it work to just use your receipts for expense tracking? Well, for some people it might, but I suspect those folks are few and far between. I know that for me, just having the receipts doesn't accomplish anything. Yes, I could look at them to see how much I spent, but there's no way to organize this data or to get an overview of my spending habits unless I categorize it somehow.
Receipts are a temporary record of your spending; for this information to be useful, you need to store it in a more permanent way. (In the olden days, this meant using some sort of ledger book. Nowadays that means using a spreadsheet, a software program like Quicken, or an online tool like Mint.)
What about you? Do you track your expenses? If so, how? What level of detail do you go to? What categories do you use? Have your methods changed over the years? Or do you find expense tracking just too much overkill? What words of wisdom can you offer Crystal?
Related reading: In April, I posted a question from Stephanie about the next step in the process: Once you've tracked your expenses, what do you do with the information? At this rate, Get Rich Slowly will eventually have a complete library of reader questions regarding every stage of budgeting.
More on Get Rich Slowly and MSN Money:
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