As Americans, we live in a consumerist society. Spending is not only a part of our everyday lives, but it is the lifeblood of this free market economy. Our purchasing decisions fuel small mom-and-pop shops and giant retail chains. Spending habits drive Main Street and Wall Street. And how we spend shapes our financial health as individuals, families, communities, as a nation, and even as members of a deeply interdependent global economy. Why do you think economists make such a big deal out of the holiday shopping season? The gifts we buy for each other during this time of year are a true bellwether of how Americans are feeling about their personal finances and the economy writ large.
So obviously spending is important and necessary. But it’s also important and necessary to spend judiciously, responsibly, and consciously. The only real way to do that is to effectively track your spending. This is a true challenge for many households. Indeed, we spend constantly on necessities, selective purchases, investments, transportation, and the little odds and ends expenses that pop up every day. And of course, life is filled with unpredictable expenses from leaky roofs to broken appliances; from medical bills to your kid’s sudden and costly interest in winter sports.
This is just one reason that many Americans struggle to maintain a household budget. It’s difficult to create a budget without first making an honest appraisal of how you’re spending your household income. Where is your money going? How much of this spending is necessary? How much of this spending is discretionary (i.e. optional)? These are important questions you’ll need to ask and answer in order to get a handle on your household budget. This means first finding effective strategies for tracking your spending.
If you’re curious how most Americans spend their money, you can learn more here. Otherwise, read on for a look at ten ways that you can do a better job of tracking your spending.
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1. Study Your Bank Account Statement
Fortunately for you, there is at least one place where this tracking is done for you. Review your bank statements as a starting point, especially if you’re beginning at ground zero when it comes to tracking your spending. Ultimately, you’ll want to track your spending as you go.
But if you’re at the beginning of this journey, start with an audit of your spending habits. Review the last few months of your bank statements as well as statements for any credit cards you’ve used for spending. Make a spreadsheet and identify the items that occupy the majority of your budget. This is critical to understanding where your money is going as well as identifying areas where you’re overspending.
Remember, though, this is just a starting point. Naturally, your bank statements leave out key spending items like your cash expenses or automatic withdrawals from your paycheck for health insurance, retirement funds, and other employee benefits. In other words, this is only a partial picture. But it should help bring the fuller picture into view. Not only that, but having a detailed accounting of your own spending is a great way to cross-check your bank’s ledger. Mistakes do happen. Track your spending and put yourself in a position to spot them.
2. Use Your Monthly Income as a Baseline
Tracking your spending begins with an appraisal of what you actually have to spend. What is your take-home monthly income after taxes? If you work on a freelance basis, as part of a gig economy, or otherwise take in an irregular income, Ramsey Solutions advises using the lowest month of earnings as your baseline income. Ultimately, you’ll be subtracting your expenses from this figure.
Essentially, before you can begin to understand how you’re spending your money, you need to understand how much you actually have to spend. Sometimes it can be eyeopening to realize that your income isn’t the reason money feels tight. It may in fact be your spending.
3. Take Inventory of Your Billing Accounts
On the subject of spending, the first set of data should be the money you must spend every month, or in quarterly or annual increments, to retain essential living requirements. Budgeting begins by cataloging your monthly billing commitments and calculating how much these commitments cost you.
Chances are the vast majority of your dollars are going toward costs like residency, utilities, and other relatively non-negotiable costs. But you may also identify an array of media subscriptions, medical bills, credit card debts, service packages, and miscellaneous other regular expenses, some of which may actually be optional.
Make sure you have a complete picture of what these commitments cost you every month. This is the baseline figure for your spending as well as a great way to identify areas where you can cut monthly costs. Ultimately, you’ll want to calculate your overall monthly spending baseline and hold it up against your income. The difference is a key figure—one that determines how much money you really have for priorities like saving, investing, and discretionary spending.
4. Categorize Your Spending
Now that you know how much of your income you’re spending on monthly essentials, it’s time to get a little more detailed. You’ll need to divide your expenses into several key categories—this includes both your discretionary spending (dining out, home decor, entertainment, etc.) and your baseline spending (housing, groceries, utilities, etc.)
Ramsey Solutions says to “List your expenses in this order:
- Giving (10% of your income)
- Four Walls (food, utilities, shelter/housing and transportation)
- Other essentials (insurance, debt, childcare, etc.)
- Extras (entertainment, restaurants, etc.)”
Naturally, you can use whatever system makes the most sense for you. If a notable portion of your spending goes toward something like collectibles, or traveling, or pursuing your wood-working hobby, create a novel category to account for this spending.
In fact, you can get as granular as you’d like. Forbes even suggests that “Rather than tracking categories, consider setting limits on what you’ll spend at each store you frequent.”
In other words, if you tend to visit Target weekly and you spend money on a wide variety of items fitting various categories, you may just choose to list Target as a spending category. That could make it a lot easier to set and keep a budget just for Target.
5. Track As You Go
Most of the tips above are meant to serve as a starting point. These tips can help you take inventory of your income, your spending, and how the two relate. But once you’ve taken a deep dive into your past finances and spending habits, it’s time to start tracking in real time. The best thing you can do is track your spending as it happens.
There are plenty of ways to do this. Find a method that works for you, whether it’s a spreadsheet, an expense tracking app, or a good old fashioned legal notepad. Type or write down every purchase or payment as it occurs.
Obviously you don’t have to stop and fill out your little legal pad the exact minute you spend each dollar. Consider ending each day or week with a rundown of your spending. Ramsey Solutions says “Whatever works for you and gets every expense tracked with no paper receipts getting lost in that kitchen drawer that must be some kind of portal to another world.”
Begin monitoring your spending more actively. It can also be a great way to identify room for improvement and track your progress achieving this improvement.
As noted above, there are plenty of different ways to track your spending. It’s all about your comfort level. But there are mobile apps that can make it especially easy to track, enter, and integrate information about your spending. Some of these apps can also provide useful analysis of your spending habits and helpful, personalized tips.
6. Try a Budgeting App
If keeping a budget is a relatively new undertaking for you, don’t be afraid to get a little help from one of these budgeting apps. Nerdwallet says that apps “like You Need a Budget and Mint are designed for on-the-go money management, letting you allocate a certain amount of spendable income each month depending on what you’re taking in and what you’re paying out. These types of apps will work if you’re willing to log your purchases, put in the time and stick to your budget.”
Most of these apps offer free basic user packages. There’s no harm in trying out a few to see which spending tracker app works best for you.
7. Create a Separate Spending Account
Once you’ve determined what you’re spending and where you’re spending it, you can set a more purposeful budget for recreational and variable activities. Forbes suggests that one effective way to monitor your spending on these elective expenses is to open an entirely new account dedicated just to this type of spending.
You can place a predetermined amount of each paycheck into this account. With the burden of your essential expenses placed on a primary checking account, you are free to spend the money in this account on elective purchases and experiences. If the funds in this spending account dip below a certain threshold, you can temporarily curtail discretionary spending without imperiling your ability to pay those essential monthly bills.
8. Be Honest With Yourself
Tracking your spending can be a somewhat intimidating challenge. You may be nervous to come face to face with your more wasteful habits. But this isn’t about judging yourself. This is about getting a handle on your finances. So in order for this to be an effective undertaking, it’s important that you approach your own spending habits with objectivity.
My Money Coach advises that “You’re only cheating yourself if you selectively keep track of where you’re spending your money. When you start out, resist the temptation to adjust your spending as you start feeling guilty or begin to see patterns. After a week or two of gathering actual information, it’s then okay to start making choices about your priorities.”
Don’t let guilt, anxiety, or fear prevent you from shining a light on your own spending habits. In many ways, this process can force you to look in the mirror. But remember, this is an important first step toward improving your habits. Be kind and patient with yourself as you learn new habits.
9. Be Adaptable
Speaking of learning new habits, the benefit of tracking your spending is identifying opportunities for improvement. Nerdwallet says “As you track, be ready to make adjustments. It’s worth your time to keep tabs on your monthly expenses because of what you’ll uncover.”
According to University of Arizona lecturer Richard H. Serlin, “‘Tracking expenses can be very valuable for finding out what’s really costing you, and what is not as bad as you thought.’”
Use this as an opportunity to reconsider your attitude toward certain expenses. What do you really need and what do you merely want? What expenses are you willing to sacrifice? What spending ambitions do you have for the future and what must you do now to make these ambitions attainable? These are questions you may need to ask yourself at different points in your life depending on the balance between your income and expenses.
Be prepared to revisit these questions regularly as you learn how to make, keep, and amend your household budget.
10. Don’t Get Discouraged
Remain positive and confident even in the face of the occasional setback. As you pull back the curtain on your own spending, you will likely continue to discover habits in need of change. Don’t let these discoveries discourage you from your progress.
According to The Balance, “When tracking your expenses reveals that you overspent in a few categories, it can be tempting to stop identifying expenditures and try again next month. But it’s important to continue to track your expenses throughout the month so that you can identify what you need to change and by how much.”
Do not think of these instances as failures. Think of these as opportunities for change.
For a deeper exploration of the challenges that ordinary Americans face in their efforts to curtail spending and prioritize saving, check out our look at America’s Savings Dilemma.