How to Track Your Expenses

1. Choose a Tracking Strategy

You can track expenses using everything from traditional pen and paper to a pricey app. Pick a method that matches your personality and that you're most likely to use regularly. Here are your options:

• Write them down. To monitor your expenses, you can go the old school route by simply writing them down as you go. Or you could use the note-taking app on your phone. Regardless of how you approach it, commit to noting every penny you spend to bring your finances into sharp focus.
• Make a spreadsheet. You also can schedule a time—maybe every day or every week—to plug all your expenses into a spreadsheet. Hang on to all of your receipts and bills, and check your bank statements and credit card statements to make sure you don't miss a charge.
• Review bank and credit card accounts. Regularly checking your bank and credit card statements, either online or on paper, can help you keep on top of your spending. You can use this as a tracking method if you don't often pay in cash and all of your expenses will be reflected in these accounts.
• Download an app. There are lots of budgeting apps with expense-tracking functions, which typically enable you to track spending across various bank, credit card and investment accounts. Some are free, while others can cost more than $100 per year. Use a free trial, if offered, to test out a paid app before committing.

Learn more: How to Use a Weekly Spending Review to Stay on Budget

2. Record Every Expense

Once you've picked a method to use, jump in and start recording. Start with a goal of one week's worth of expense tracking to make sure the method you chose is working for you. After a week, if you're overwhelmed or you've lost momentum, consider shifting to a different method. Continue tracking for at least a month so that you get a solid understanding of what and how you're spending before setting up a budget.

Tip: If you plan to use a method that requires more hands-on input, such as pen and paper or a spreadsheet, be sure you have a way to easily record expenditures when you're out and about. Then, make time to transfer all those logged expenses into your main tracker.

3. Monitor Bank and Credit Card Statements

You can use online bank and credit card account portals to fill in the blanks if you miss one or two expenses when using other tracking methods. You can also do all your tracking via bank and credit card statements, if you primarily pay by card and you're committed to paying off your credit card bill in full each month. In many cases, banks and credit card issuers offer online tools that generate spending reports, often featuring detailed breakdowns of spending by category, by month and so forth.

Learn more: How to Read a Credit Card Statement

4. Categorize Your Expenses

When you start expense tracking, you'll have a lot of data to work with. As a next step, put your expenses into categories. Divide them into fixed versus variable expenses first, then sort them further based on the type of charge.

Here are some common fixed expenses:

• Housing payments, such as a monthly mortgage or rent
• Flat utility bills, like a phone or internet bill
• Insurance premiums
• Installment loan payments, such as for student loans, car loans or personal loans
• Recurring subscriptions or memberships
• Regular child care
• Children's activity costs

Variable expenses can include:

• Utility bills that fluctuate, like electricity or heating bills
• Gas
• Credit card bills
• Groceries and meals out
• Entertainment, such as movies or concert tickets
• Home and car repair
• Personal care
• Clothing
• Non-regular child care, such as an occasional babysitter for date nights

Set up these categories so that you can easily classify your expenses regularly going forward and compare your spending month to month.

5. List All Sources of Income

Next, add up all your sources of income. If you're budgeting with a partner with whom you've combined finances, include their income too. This will help you compare your earnings with your expenses and apply your expense tracking efforts to making a budget. Include all sources of income, such as wages, investments, public assistance, alimony or child support and retirement account distributions.

Tip: If your income fluctuates from one month to the next, look over your pay stubs for the last year, add them all together and divide by 12. This will give you an average of how much money you'll be working with each month.

6. Set Budget Limits

To make sure you're saving enough, decide how much you want to spend per month as a percentage of your income—or, alternatively, decide how much you want to save first, then work backwards from there. (This is called the "pay yourself first" method of budgeting.) You can also choose budget limits by category. That could mean, for example, that you'd like to spend no more than $100, or 5%, of your income on personal care per month.

Another option is to use a guideline like the 50/30/20 budget to determine your spending limits. This rule recommends spending no more than 50% of after-tax income on necessities, no more than 30% on discretionary items and at least 20% on savings and debt payoff.

Learn more: Tips for Low-Effort Budgeting

7. Make Tracking a Habit

The first few months may require a lot of setup, but soon, you can make expense tracking a habit. Set aside time each month to double-check your data, categorize it properly and check whether you're sticking to your budget. You'll likely find that some expenses are variable that you thought were fixed, or that you're spending more or less in a certain area than you realized. You'll only gather these insights if you track expenses on an ongoing basis and take note of any patterns.

Tip: Use truing up your budget as an opportunity for a weekly or monthly self-care moment. Put on a moisturizing face mask, put a favorite show on in the background or, if it's in your budget, get a fancy coffee or some takeout and sit down with your budget.

Learn more: Tips for Spending Money Wisely

8. Adjust if Needed

It's unlikely your budget will stay the same forever. As you continue tracking expenses, you'll notice that you may need to adjust your budget. Expenses change as life changes, and it's important to shift your saving and spending goals when you buy a house, have a child, get divorced or experience any other major change. You may also need to shift how you spend when your income changes or you've had unforeseen costs, such as car repairs or medical bills. Plan to stay flexible and make updates to your budget as you watch your spending change.

Learn more: What Is Lifestyle Creep?

The Bottom Line

Tracking expenses is the first step in any budgeting plan. You can't work toward spending wisely and saving more until you know exactly how much you earn and where that money is going. Understand your financial behavior so you can decide how you'd like to change it, and make adjustments to your budget to help bring your dreams within reach.