After taking the time to create an overview of my financial situation, you learned with I had a good ratio of my income and expenses with money left over. You can find the overview here. However, this leftover money didn’t show up in my savings account at the end of each month. The question I asked myself then was, “Where is the extra money disappearing?”. I had to find out as it was a substantial amount that could be used for a down payment on a property I decided to buy.
To be honest, I had no idea where my money was going. Ok, that’s not completely true. I did have an idea but didn’t want to believe it was true. Thus, I decided to track my spending for the following month. It’s something my mum always advised my brother to do as he was really bad with money. She was never too worried about me as she saw I was doing well. At least in the sense, I could purchase what I wanted and knew I had no debt in comparison to my brother. Despite her advice being for my brother, I always paid attention to what she was saying. And this was the time to implement her advice on tracking my finances to see where all my money was going.
You should track your finances for at least the full month. Three months might be wiser as there might be irregular payments that don’t come up every month. You can track your spending for this short period of time, or better yet, you can commit long-term. It’s entirely up to you. However, I do believe that eventually, you will get to a point when you don’t even have a need to track your spending anymore. You will be comfortable with the setup you created. But that’s yet to come. Now, it’s time to track your spending.
WAYS TO TRACK YOUR SPENDING
There are a couple of ways to track your spending, from the most simple way to more complex tracking. All of the following can be done for free which is perfect since we’re trying to figure out where your money is leaking and not to add another expense to your list.
1. PEN & NOTEPAD
Very old-fashioned but a way to track your finances nevertheless. If you’re someone who is not fond of modern technology, then this is the way to go. Keep a notepad and a pen with you at all times. Every time you make a purchase, be it a small or huge one, write it down immediately. The con of this method is you have to make all the calculations at the end of the month yourself.
On a positive note, you always have a piece of paper and a pen lying around, so it’s the easiest way to start tracking. If you’re anything like me (a stationery geek), you might have a nice Moleskine or Leuchtturm notepad lying around that will come in handy for tracking now.
2. EXCEL SPREADSHEET
If you’re already into technology but don’t have a smartphone, then an Excel spreadsheet is your friend. Every time you make a purchase, ask for a receipt. Once you get home, sit down and add all your receipts into the spreadsheet every evening. But you have to be sure you will dedicate the time in the evening to track your spending. At the end of the month, Excel does all the calculations for you. However, if you don’t believe in yourself doing it regularly every day, you better try options no. 1, 3, or 4, as it’s something you do right after you spend your money. It’s less likely for you to forget to add the expenses to your list.
3. NOTES APPLICATION ON A MOBILE PHONE
You might like the Pen & Notepad option, but you don’t like to carry it with you at all times? I suggest you turn to the notes app on your mobile phone. Be it iOS, Android, or Windows phone. There’s a note app on every phone, either by default or available for free download. After every purchase, you make a note, and you do the calculations at the end of the month yourself.
4. OTHER TRACKING APPLICATION
The most convenient and easiest tracking system I know. After each purchase, you add what you bought into the app with a date, amount, and description of the item. Apps usually allow you to select a category (utility, entertainment, food, clothes, drugstore, petrol, etc.) or let you set the categories yourself. At the beginning of your tracking journey, I wouldn’t make the categories too complex and start with just a handful. This way, you won’t get overwhelmed when entering your spending at the very beginning of your journey. Every app will keep track of your spending up to date (if you enter everything) and provide you with an overview of your spending so far and also at the end of the month per each category. The bonus is you always have your mobile phone with you. It can’t get easier than that.
ESSENTIAL VERSUS NON-ESSENTIAL SPENDING
Whichever tracking system you decide on, I would advise you to do a simple split of your spending to essential expenses (such as rent, mortgage, debt repayments, etc.) versus non-essential expenses (tickets for concerts, makeup, sports gear, etc.). The difference between the two categories is that the first one is something you have to pay and the other is not a necessity, and you can live without it. Yes, even if you think you can’t live without it (gym membership, latest makeup, hairdresser, concert tickets, etc.). These are items you can survive without.
Use food, for example. You think the food is a necessity, and you’d be right. Food is something we need to survive. However, there’s a difference between spending your money on groceries and cooking for yourself versus splurging on a fancy meal in a restaurant. A meal in a restaurant or fast food is not something you need in order to survive. That’s convenient. So please keep that in mind when you track your spending. This will help you understand whether you spend your money on necessities or conveniences. It will be much easier to find areas of potential savings and create a budget later on.
TRACKING MIGHT BE UNCOMFORTABLE AT FIRST BUT PERSEVERE
I know, I know. It’s boring and maybe a little bit annoying to track your finances. Your friends will look puzzled and have question marks in their eyes when they see you writing down your expenses for the first time. It might be really uncomfortable and unpleasant. Trust me, I’ve been there and this is exactly what happened to me. However, I got over it eventually. If you have good friends like mine, they’ll understand what you’re trying to do and support you. They might even start thinking about their own finances and join you in your tracking journey. You never know. Just because your friends think you’re crazy, it shouldn’t stop you from tracking. So persevere I say. As long as you know where your money is going, you can make a proper evaluation of your spending. Are you spending on items important to you or elsewhere? You can identify money wasted and allocate them towards your goals.
We’re going to discuss your goals in one of the following posts, so stay with me. For now, tell me, if you tried tracking your expenses and what have your learned? Are you going to try it now? If so, why?