Can you believe? There could actually be benefits from tracking your expenses! Crazy, right? Who would think there could be any value or gain from writing down every penny of your spending over the course of month let alone a year or longer. Many people see and feel it as pain, agony, and torture. That there are so many other more enjoyable things with their time. I agree that it can be daunting, perhaps not fun, or possibly emotionally draining. I suspect some of that angst comes from not wanting to see “reality”. Perhaps some what does it matter anyway, guilt, shame, and annoyance? Who needs a self inflicted downer?
Despite that possibility, there is great opportunity to bring about both short term and long term financial benefits by investing your time in tracking your expenses.
Let’s take a look at five benefits from tracking your expenses.
Capturing every penny of spending will bring awareness of how you spend your money. You are writing or recording everything as you go, so no doubt that you will see it all. The kimono is wide open! All the good, bad, and ugly is in there. The key to success is no judgment. Just capture the information. No getting upset, no glee, no stomping around. Just capture the information.
This will bring awareness to your reality versus what you think may have happened. You can start to see what spending feels right and what feels not so good. Again no judgment.
The other side of the spectrum is looking at your bank account at the end of the month and wondering where it all went this month. That’s not a good feeling either. It’s hard to understand and change what you don’t know. Yes, you may “know” that it “feels” like you spend a lot on xyz and not very much on abc. However, our minds have a great way of bending the truth to make it more comfortable for us.
Step 1: Bring awareness to your spending and write every penny of spending down. No matter the source – cash, credit card, debit card, or online payments.
See the Monthly Picture and Adjust
At the end of the month it’s time to add everything up. Categorize your spending into basic categories like housing, entertainment, insurance, taxes, recreation, etc. Put all the daily spending items into their categories and total all spending for the entire month. How did you do? Reflect on the reality of what you see. Do you like how you spent your hard earned income? What was ok? Where didn’t it sit so well? What made you mad or upset? Do you see any surprises either positive or negative? Did you find some “leakages” where money seemingly disappeared without intention? Take some notes about everything from the good to the bad to the ugly. No judgments.
How does your spending align with your goals and values? What categories would you like to adjust? Where is there opportunity to bring your spending to a more positive place for you? One that balances your daily living with your best financial future and prioritizes spending where you want to versus have to. How are you taking care of your future financial self? Are you taking advantage of retirement savings at work? Adding to an emergency fund? Cleaning up your debt?
Step 2: Categorize your spending and add everything up. Reflect on last month. Adjust intentions for next month.
See the Annual Picture and Adjust
Follow the monthly process over and over. Go through the same process and questions. As you progress, you will start to see positive changes in the monthly views. In fact, things might look better and better for where and how you spend your income. As a result, you might even start to feel good about the direction you are moving and how you are balancing your today with your long term goals.
Finally, add up the monthly pictures into the annual view. This will allow you to capture those once a year expenses and quarterly expenses so you have your complete financial picture. At this point, go back and answer the questions from the monthly review, but this time from the perspective of the annual view. Jot down some notes about the positive trends and what you like as your habits shifted over the year. What didn’t go so well? Be honest and assess what you think happened? How can you make positive changes in that area for the year ahead?
Step 3: Add up your monthly tracking subtotals into the annual view. Reflect on the year. Adjust for next year.
Identify Your Long Term Goals and Values
As you are caring and tending to your short term financial health, it’s important to keep an eye on your long term goals and values. Tracking your spending will help you see the possibilities for the what, where, when, how, and why of your long run plans. In fact, the first step might be defining your long term goals and values for your spending decisions.
Everyone will be unique in what matters most to them. However, typical goal items would be retirement, college, care for parents, travel, vacation property, hobbies, or lifestyle activities (i.e. skiing, boating). On the other hand, long term values for financial consideration could be around bringing family together regularly, shared experiences with friends, frugal living, volunteering your time and energy, or building a multi-generational family business.
Step 4: Identify and prioritize your long term goals and values.
Balanced Living – Finding the Sweet Spot
Once you’ve nailed down your highest priority goals and values and identified the needed dollar amounts, you can bring them together with your spending plans. An important consideration is how to balance the day to day with the long term. Too much short term focus means heavy catching up, changing, or giving up on long term goals. In contrast, too much long term emphasis means squeezed short term living which can be not pleasant or enjoyable in the moment. The goal is to find the sweet spot for balanced living through trial and err.
The approach many people take is “easy” way. See what’s left over at the end of the month and put that towards long term goals. However, that’s a hit or miss approach and there are too many “opportunities” in the month to have that plan not work. Think: too many lunches out, that “always wanted this” purchase, and generally hmmm I’m not sure where it all went. That leads to the “try again next month” syndrome and potential frustrations about not making any progress. Continued frustrations grow into losing steam and energy before giving up, which doesn’t serve you well.
Instead of funding your long term goals at the end of the month, what if you turned that completely around and set aside those funds first? That might look like automatically having withdrawals from the checking account into your various savings/investing accounts. What a commitment that would be for your future financial self!
Step 5: Balance saving for your long term goals with your short term financial needs.
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There are multiple benefits to tracking your expenses! Yes, it takes effort and energy to capture that useful information. The process can bring a range of positive and not so good emotions along with it. The goal is not to judge, rather to reflect, learn,and adjust. It’s a practice and not every day is going to be great or perfect. It’s ok. Just keep with the journey!
To help you know your starting point in your journey I built an Excel spreadsheet that allows you to capture your expenses and categorize them. In order to provide more useful information, this will automatically summarize your spending into categories and provide the monthly totals.
I hope this tool helps you to be more informed and makes for a simple process to reflect and adjust month to month as you find your best best path toward your long term goals and values.