The Modest Wallet is a free digital publication delivering its readers simple personal finance solutions. We regularly partner with brands that have products and services that will help our readers. Some of the links in this post are from our partners. How we make money.
To make the most of your money you need to know where it’s going, so learning how to track expenses is a key skill to improve your financial wellbeing. Most people have a general idea, but when it comes down to the actual dollars and cents, they couldn’t tell you how much they are actually spending in each category. This is because many people don’t realize the true importance of keeping track of their expenses.
Tracking your expenses not only puts you in control of your money, but it provides you with a wealth of additional financial benefits you may not have thought of. Keep reading to learn how you can take charge of your finances and discover all the advantages expense tracking has to offer.
Why Do You Need to Track Expenses?
Keeping track of your expenses may seem like tedious and unnecessary work, but it is the cornerstone of good financial health. Without making the effort to track your expenses, you really don’t have an accurate gauge of your financial situation which makes it impossible to plan for your future and effectively achieve your goals.
What Are the Advantages of Tracking Your Expenses?
There are a number of advantages when it comes to tracking your expenses. However, the most important one is to actually know where your money is going each month.
Creates Financial Awareness
Taking the time to make note of each and every dollar you spend, puts you in touch with your money and helps you foster awareness of your spending habits.
Costs add up quickly when you spend without consideration. What might be only a couple of dollars here and there can quickly become hundreds or thousands of dollars each year. You may not even realize you’re spending that money that could be put to better use elsewhere in your budget.
Highlights Bad Spending Habits
Keeping track of your expenses will quickly help you discover trends in your spending and put you in a position to make positive changes.
Unnecessary spending isn’t always immediately obvious, it can be something as simple as overindulging at the grocery store, ordering in when you should have cooked, spending a little extra online shopping, or even forgetting to cancel subscription services you don’t use very often. It all adds up and quickly. Tracking your expenses will help you see where your money is going and eliminate these excess expenses no matter how small.
Allows You to Do More with Less
You might feel like you can’t get anywhere on your current income, but if you start tracking your expenses you will be surprised at how much money you actually have. Without realizing it, many of us are losing a significant portion of our income to things we aren’t even aware of. Such expenses seem small upfront but can add up to a significant amount of extra money in your annual budget, and keeping track of these expenses helps you put that money back into your pocket and to better use in the future.
Helps to Meet Your Financial Goals
Since keeping track of your expenses puts you in touch with your money and helps you to identify and cut out excess spending, it also makes it a lot easier to achieve your long term financial goals — whatever they may be.
Though you might not realize it, making a change as small as skipping the morning coffee or packing a lunch for the office could easily amount to hundreds or thousands of extra dollars in your budget each year. The savings can be significant and could pay for a nice vacation, take years off of your debt repayment, help you retire early, or become the down payment for your home.
Without making the effort to track your expenses and better manage your money, it would be nearly impossible to achieve any of these things. Taking control of your finances not only makes this possible, but it also helps you see the changes you need to make to get where you want to be.
Get our free Personal Finance Blueprint to learn everything you need to know to build wealth.
Plus our best money tips delivered straight to your inbox.
Exposes Unusual Expenses
If you are regularly keeping track of your expenses, you are much more likely to notice when something is amiss.
Whether it’s a fraudulent transaction on your credit card or an additional charge on one of your monthly bills, taking time to track your expenses will make any abnormality immediately obvious. This comes with a number of benefits, such as helping you save money and providing you with an extra layer of protection against identity theft, a problem that is unfortunately common and much easier to take care of when discovered early.
How to Track Expenses?
There are three basic steps to track your expenses. First off, you need to create a budget your can actually stick to. Then, you need to list and categorize your expenses. Lastly, you need to monitor your progress to ensure you are on track to meeting your financial goals.
Create a Budget
Creating a budget is simple, you’ll need to start by recording your monthly income. If you aren’t salaried and don’t earn a fixed income, take the average of a few months to establish a rough baseline to work from. If your income varies drastically from month to month, you may need to start by totalling your expenses and working backwards to determine how much your cost of living is for each month.
Once you have settled on a static figure for your monthly income, you will need to move on to recording your monthly expenses. Start with the necessities like your rent or mortgage, monthly utilities, car payment, insurance, and groceries, before moving onto things like savings allotments and your entertainment budget. You can start to record these expenses by reviewing a few months of your banking history and taking down the numbers, again any variable expenses should be added together and averaged out from a few months of data to offer the most accurate number.
After you have accounted for all your income and expenses, you’ll need to balance the two numbers. When you subtract all of your expenses from your monthly income you should not have any money remaining, if you do then you’ll need to adjust the categories in your budget until it zeroes out. This doesn’t mean that you should use the remaining funds to inflate your lifestyle. Remember that your savings, investments, and any debt repayments are all part of your monthly expenses as well as variable expenses like your monthly groceries and utility bills, all of which should be prioritized over adding to luxuries.
Once you have completed those three simple steps, you will be left with a basic budget. You might find that this first draft is hard to follow or doesn’t put you where you want to be with your goals in a timely manner, and that’s okay. Budgeting is a work in progress and you will revisit this step later to make changes as you get some real-world practice and discover your needs.
Categorize Your Spending
With your basic budget in hand, you are ready to take the next step in expense tracking by categorizing your expenses. This will give you a much clearer view of where your money is actually going each month, and make it easier for you to make revisions to your budget as needed.
Generally speaking, expenses fall into three main categories: fixed expenses, variable expenses, and periodic expenses. Keep reading to find out how these categories are defined and learn how to sort your own expenses into them.
Any cost that doesn’t vary month to month is considered a fixed expense, your rent or mortgage, car payment, health insurance, and student loan payments will all fall into this category.
Fixed expenses generally cannot be cut down to better fit within your budget, though you may be able to lower the monthly cost on some of them through serious efforts such as refinancing. Unless your fixed expenses are unreasonably high or you are in a good situation to do so, you’ll want to avoid going to such extremes to reduce them. If this is something you are considering, talk to a financial advisor to see what your options are and make sure that it would be a good decision in the long term.
Expenses that are fluid and may change or fluctuate but still occur each month are considered variable expenses. For most people, this will include things like utilities, groceries, gas for your car, your monthly entertainment, and dining out.
Your variable expenses are generally the areas where you can make cuts and adjustments to your budget, even on some of the necessities. You should make it a priority to focus on cutting back on non-essentials first, like eating out and personal spending. But, if you are really in a pinch you will likely be able to lower your grocery budget by planning ahead and making better choices at the store or reduce your utility costs by being mindful of your electricity, heat, and water usage. There are likely many devices in your home that are sitting idly and constantly draining power which could easily be unplugged and replugged in when needed.
Periodic expenses are those that don’t occur on a regular or monthly basis, they can be fixed or variable amounts. Property taxes or an outstanding amount on your income taxes are expected but periodic costs, while things like vehicle repairs or vet bills can be unexpected periodic expenses.
Due to the irregular nature of these costs, they may tend to be substantial. You’ll need to include an additional category in your budget to set aside the money required to cover these expenses so that they do not upset your regular budget or cut into your savings.
Necessities versus Luxuries
In addition to breaking your costs down into the three main categories, it can be helpful to separate them into needs vs wants. We already talked about how you can typically cut back on variable expenses but not the fixed, yet not all variable expenses are luxuries and not all fixed are necessities.
Your Netflix or Spotify subscription could be classified as fixed expenses as they cost you the same amount each month, while your household utilities probably fall under variable expenses. Adding this additional classification will help you identify areas in which you can make changes.
Monitor and Record Your Incoming Expenses
Get in the habit of noting each expense as it comes and reviewing them at the end of each day or week. You can keep track while you are out shopping on your phone or in a notebook, whatever is easiest for you. You should take the time to record all of your transactions, even if you are paying with a card and will already have a record of the transaction from your financial provider.
Manually logging your transactions allows you to ensure each and every dollar you spend is accurately accounted for and keeps you actively involved in tracking your expenses, giving you a better handle on your finances and making you less likely to overspend or make impulse purchases. This can be exceptionally helpful when shopping online as there can be a real disconnect between the value of money you are spending and the act of making a purchase on your phone or computer.
Best Ways to Track Expenses
There isn’t one right way to keep and track your expenses, you have lots of methods to choose from. What’s important is finding which system works best for you and sticking with it.
Use an App
Apps are a wonderful option for newcomers and experienced budgeters alike, they offer a lot of benefits you won’t find with any other method of budgeting. For example, most apps allow you to budget from anywhere and update automatically to offer you a consistent and up to date budgeting experience between phone, computer, or tablet.
Many apps also automate much of the budgeting process, importing your past and present expenses from your bank account, flagging unusual transactions and even send you notifications when you are close to reaching your spending limits. There are a great variety of apps to choose from, so you are sure to find something that suits your needs and budgeting style.
Here are a few of our top recommendations:
Personal Capital is a popular web-based app that allows you to organize your spending and savings automatically. You can customize your expenses by category, date or merchant. You can also set spending and savings goals and see if your retirement savings are on track so you can retire by a specific date. The best part is that it’s free.
Another cool feature that Personal Capital offers is its net worth tracker. Understanding how much you have versus how much you owe is a great metric to assess where you are financially.
The Tiller Money app helps you create customizable spreadsheets that are automatically updated on a daily basis to track your spending, transactions and account balances. The app securely pulls information from banks, credit cards, mortgages, brokerages and many other sources to keep to see your spending in one place.
When you sign up, you are required to link all your accounts, choose a platform (Microsoft Excel or Google Sheets) and select a pre-built template for tracking spending, visualizing trends, budgeting and a lot more. If you are a spreadsheet lover, Tiller Money is for you.
One of the first major budgeting apps and it continues to be one of the most popular and widely used. Completely free to use.
Mint.com allows you to connect to your accounts to automatically track and categorize your spending. You can set up payment reminders for your regular expenses and also sign up to receive alerts through the app if you go over budget, as well as detects unusual spending.
You Need A Budget (YNAB)
YNAB is another extremely popular budgeting app offering a comprehensive and easy to use budgeting system. The company provides a number of video tutorials to help you make the most of the app and get started with budgeting. One month free followed by a monthly subscription cost of around $7, adding up to less than $100 per year. Subscribers save an average of $600 in their first two months and $6000 in the first year.
Mvelopes is the digital version of the cash-only budgeting method. Subscriptions start at $4 a month for a basic account and go up to as much as $19 for a premium account which provides with a one-on-one session with a personal financial coach each quarter. You also have the option to pay an additional fee for a monthly phone session with a personal finance coach. The basic account offers everything you need to get started, but if you’re struggling you might find the help worth the extra cost.
PocketGuard is an app that is focused on keeping you from spending over your budget. It links with your accounts to keep track of your incoming and outgoing expenses as well as your savings contributions. Also, it looks out for your recurring bills to try and find you better deals on the services you already use, such as your cable, internet, and phone.
Wally is one of the most recent budgeting apps to gain traction and is still in its beta phase, but its rapidly growing following shows that it is a promising contender.
Unlike most of the apps we’ve recommended, Wally doesn’t automatically track your spending and requires users to manually input each transaction in a bid to make them more aware of their spending. It offers a unique method of geo-tracking your expenses by using your phone’s GPS to determine where you’re spending money most frequently.
Create a Spreadsheet
Using a spreadsheet or ledger is one of the simplest ways to keep track of your budget and expenses, and it allows you to review long periods of time at a glance. You can create pages for weeks, months, or years, and use the built-in spreadsheet functionality to balance your budget after you’ve input all of your incoming and outgoing expenses. This is a great option if you’re looking for something that is free and easy to use.
Pen and Paper
Apps and spreadsheets are wonderful, but it can take a while to find the one you like or feel comfortable with. If you are old school, you can also track your expenses using a pen and paper. This will also give you an opportunity to reduce the amount of time you spend in front of a screen.
The biggest benefit is that it’s an inexpensive way to track your spending. Keeping track of your expenses using pen and paper can give you a reality check for your budget, as you will have to write down every single transaction. You will feel more confident in making adjustments to your budget to ensure it is meeting your goals.
Tips for Successful Expense Tracking
Remember that what gets measured gets improved, this also applies to your expense tracking. Learning how to allocate your funds is a very important task to achieve your financial goals.
Consistency is key in establishing any habit and a necessity to achieve financial success in any capacity. Tracking your expenses is no exception.
If you are not consistent and thorough in accounting for where each dollar goes, you won’t be making any meaningful difference and recording your expenses will become an exercise in futility. Thus, through consistent effort, you can make dramatic changes to your financial wellbeing and achieve things you never thought possible on your current income.
Don’t Let Yourself Get Derailed By Setbacks
There will be months when you are hit with unexpected expenses beyond what you have budgeted for and others where you might overspend, but you can’t let these occurrences set you up for failure. Instead, treat them as learning experiences and let them guide your future financial decisions and plans. Put more of your income towards savings to cover future emergencies and work to eliminate your excess spending.
Review and Adjust Your Budget
While you settle into the habit of budgeting, you should take time at the end of each month to review and make adjustments to your budget. As you get more experienced, you can limit this practice to once every few months, but you should maintain the habit of refreshing your budget periodically to ensure it continues to suit your changing needs and works towards your goals.
You might consider adjusting your budget to accommodate the difference if you find yourself repeatedly going over budget in a necessary category. However, if you’re going over budget outside of essentials, you’ll need to figure out how to cut back. Be honest with yourself, there’s no point in drafting a tight budget you can’t stick to, nor is there any point in setting up a budget you’ll ignore. Your goal should be to find a healthy medium that you can work with.
Remember, even when you’ve found the right budget, it won’t necessarily mean that budgeting will always be easy. It takes a certain amount of discipline to stick to even a comfortable budget, but it’s worth the effort to achieve financial freedom.
Effective expense tracking is one of the most important tools you can have in your financial arsenal. It may be a little time consuming but it’s easy enough to do and there are more resources available than ever before to make it more efficient and pain-free.
Regardless of the method you choose or the time involved, tracking your expenses is a worthy endeavour that pays back your efforts tenfold by putting you in control of your money and paving the way to achieve your financial goals.
Get our free Personal Finance Blueprint to learn everything you need to know to build wealth.
Plus our best money tips delivered straight to your inbox.