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Tracking your monthly expenses may be something you'd rather avoid, like visiting the dentist or the DMV. But it can help you save money, pay off debt and plan for a more secure financial future.
As economic pressure related to the COVID-19 pandemic causes many people to worry about being able to cover everyday costs, tracking expenses—and harnessing that information to create a budget—is more important than ever. Fortunately, tracking your expenses can be pretty pain-free. Read on to learn how to do it, along with how to use the information to establish and follow a budget.
Why You Should Track Your Expenses
Tracking your expenses can keep your spending on a parallel track with your income and help you avoid overspending. This goes hand in hand with setting up a budget.
Here are four reasons why you should spend the time to track your expenses:
- It gives you a clearer picture of how you're spending money. Without this insight into your finances, you might be spending more than you think. Or you could be wasting money (on an unused gym membership, for instance) that you could be putting toward an emergency fund or a retirement account.
- It causes you to think before you spend. Seeing all those dollar signs when you track expenses can prompt you to ponder your purchases. Do you really need that new phone or do you simply want it? By giving more consideration to your spending, you might be able to avoid impulse purchases.
- It helps you spot fraudulent activity. When you closely track your expenses, you can more easily catch fraudulent transactions on your credit or debit cards.
- It helps you reach your financial goals. If you know where your money is going, then you can get a better handle on where to cut expenses. You can allocate this "found" money for your children's college fund or your special account for a down payment on a new home.
How to Track Your Monthly Expenses
It's one thing to talk about tracking your monthly expenses—it's another thing to actually do the tracking. Fortunately, a number of methods are available to guide you through the process.
Whatever method you choose, be sure to track every expense—the daily latte from your favorite coffee shop, the once-a-week meal at the burger joint down the street, the every-two-weeks fill-up at the gas pump. You may be surprised at how quickly even small expenses can add up.
Here's how to get started.
Paper and Pencil
To monitor your expenses, you can go the old school route by simply writing them down. For example, you might use a special notepad or notebook designated for tracking your expenses. Or you could use the note-taking app on your smartphone to do this. Regardless of how you approach it, commit to noting every penny you spend to bring your finances into the sharpest focus possible.
You also can schedule a time—maybe every day or every week—to plug all your expenses into a spreadsheet. To make sure this method works to your advantage, hang on to all of your receipts and bills, and check your bank statements and credit card statements (either on paper or online). Again, be sure to record every expense so you've got an accurate overview of your finances once the month ends.
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. 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.
Apps that you can easily access on your phone or other devices have simplified expense tracking. Typically, they enable you to track spending across various bank, credit card and investment accounts, and many include budgeting functions as well.
If you have a free Experian account or sign up for one, you can track your expenses through the Personal Finances tool. As with a number of expense-tracking and budgeting apps, this tool lets you connect bank, credit card, investment and retirement accounts to build a customized expense tracker. It can also alert you when you spend over a set limit you designate per purchase (say, $100) on your credit or debit cards, and send you a report of your top spending categories each month. It allows you to easily see your expenses and track your credit score in one shot.
Other spending trackers include:
- You Need a Budget (YNAB)
How to Benefit From Expense Tracking
So, you've created a spreadsheet or downloaded an app to track your expenses. Now what do you do with all that data?
If you're tracking your expenses to find areas where you may be able to cut back or add to your savings, the best use is as the foundation for a budget. Just like tracking your expenses, creating a budget can be done with paper and pencil, spreadsheets, online accounts or apps. To ensure you stick to your budget, adopt whatever budgeting method works for you—there's no right or wrong way to do it.
Why You Should Create a Budget
You often hear about the importance of creating a budget. But why should it be a key part of your financial plan? Establishing a budget, and then sticking to it, allows you to:
- Spend less than what you earn. Living within your means is much easier to do if you have a budget. Without one, you might not fully understand whether you're overspending—or just how much your overspending might be costing you.
- Reduce debt. A budget helps you identify essential and nonessential expenses, an exercise that lets you spot areas where you can trim spending and allocate that money to slash your debt.
- Set aside money. Relying on a budget puts you on the path toward saving money for a variety of purposes, such as bulking up your retirement accounts or adding to an emergency fund.
- Realize your financial goals. Is there a bucket-list trip in your future? Do you want to have enough money to send your kids to college? A budget can help you accomplish these and other financial goals.
How to Make a Budget
Equipped with information about your spending, you can set up a budget. Aside from tracking your spending, here are three steps for getting it done:
- Figure out your income. Comb through pay stubs, bank statements and other documents to get a firm grasp of your monthly income. This money should include salary, government benefits, investment gains and side-gig cash—anything that could be classified as income.
- Separate essential and nonessential costs. Divide your tracked expenses into categories, creating buckets for recurring essential expenses like rent, utility and car payments, and also for discretionary spending, such as travel, restaurants, streaming subscriptions, clothes purchases and the like. You can lump all of your recurring essential expenses into a single category or divide them into separate categories, such as housing costs and automotive expenses; you can do the same with discretionary spending.
- Settle on your goals. With a broad view of your income, expenses and spending habits, decide on your financial goals. Do you want to retire at age 60? Do you want to buy a house within the next two years? Do you need to set aside more money for emergencies? Once you know your goals, you can use your budget to help you reach them.
How to Reach Your Financial Goals
Once you have a budget and know your goals, consider these two tips to help you achieve them. They are critical in the midst of a rocky economy, but can be applied during any economic situation.
- Embrace frugal living. Among the moves you can make to put more money in your pocket are:
- Shop around for cheaper internet service.
- Refinance your mortgage to get a lower interest rate.
- Cancel unused subscriptions and memberships (like those for streaming services or the gym).
- Cut back on restaurant meals.
- Buy clothes only when they're on sale.
- Take on DIY home improvement projects rather than hiring pros to do them.
- Spend less. Ways to trim your spending include:
- Consolidate your credit card debt. By swapping out higher-interest debt for lower-interest debt, you likely can chop down your annual interest payments and save more over time. You could do this by transferring a balance from a higher-interest credit card to a lower-interest card or one with a 0% introductory interest rate. You could also consider taking out a personal loan that carries an interest rate that's lower than the rate(s) you're currently paying on your credit card debt.
- Shop around for insurance. You might be able to lower your auto or homeowners insurance premiums if you compare rates from several insurers. You also should explore insurance discounts, such as those for maintaining a good driving record or for bundling your policies with one insurer.
- Take a timeout before making a big purchase. Are you coveting a new car? Have you been dying to buy new furniture for your bedroom? Before you put down your hard-earned money on a large purchase, stop and think about whether you really need it, or if you might be able to find a workable used car or second-hand furniture. If you can use the extra money in your budget to save for those purchases, you could avoid paying interest on them—and you might even realize you don't need them at all.
Don't Forget to Check Your Credit
Once you've built a system for tracking your expenses and creating a budget, be sure to also monitor your credit. This could include regularly checking your credit report or signing up for free credit monitoring and can be especially helpful if you're planning a big purchase in the near future, such as a house or a car.
Keeping on top of your credit can, for instance, give you an idea of whether you should work to improve your credit score before applying for any new credit.
The Bottom Line
Tracking your expenses certainly isn't as fun as plopping down on the sofa and binge-watching a show on Netflix or playing in the backyard with your kids. But it definitely can give you more money for fun—and for checking short-term and long-term financial goals off your list—by identifying how and where you're spending money, and then establishing and following a budget.