If you’re just stopping by for the first time, this is the third class in a series of classes over the next few months which will culminate in the development of a complete financial plan. Stop by the orientation class HERE first for class orientation/overviews and HERE for more information about the website.
Class Objectives: To understand the value of tracking expenses and learn how to set up a system that works for your situation.
Prerequisites: PF101: Personal Finance Overview & Setting Goals
Handout: Download the quote below and hang it on your wall where you will see it often.
Assignment: Download the expense tracking spreadsheet in Excel | Google Docs (preview in lecture material) OR set up & use personal budgeting software such as Mint, YNAB, Quicken, etc.
Hello! I’m excited to talk today about how to track your expenses. This is going to change your life, guys! You have your financial goals set, you know exactly where you’re at financially by creating your net worth statement and now you’re going to see where all of your money is actually going every month. Now you might be thinking that this is going to be boring. Well…you’re probably right. It’s going to be boring and tedious at first. What it’s not going to be, though, is a waste of time!
When I was a kid, my parents kept all of their receipts and tracked everything that they spent because money was always so tight. Even on vacations, my mom had a notebook where she’d write down every little item purchased. So, after I graduated from college and both my husband and I had full-time jobs and did not have to struggle to make ends meet, I was glad that I wouldn’t have to track every single penny I spent. We never had a balance on credit cards, I only had a small student loan balance from my graduate degree and we didn’t live extravagantly by any means. I even did an annual budget each year based on our current incomes and was excited to see how much money we were going to save. However, when it came down to the end of the month or year, we weren’t saving hardly any money at all and we weren’t sure where it had all gone. It just wasn’t there.
And I realized that although I didn’t have to track every penny because I was blessed to have enough (enough pennies, but also dollars even!), I still had a lot to gain by tracking my expenses each month. Once I started tracking everything we spent, I saw how the little purchases, such as eating out for lunch every day, were adding up and I was able to be more focused on the specific categories I wanted to cut back on so that we would have more money for things that we wanted more.
WHY BOTHER TRACKING YOUR EXPENSES?
Keeping track of each and every expense is key to creating your budget, also known as a spending plan if the word budget makes you cringe. You need a starting point as to what you are spending on things in any given month so that you can decide whether this aligns with your goals, or if the money would be better spent somewhere else (or saved). It also makes you acknowledge how many little things you spend money on and how they really can add up.
STEPS TO TRACK EXPENSES
Let’s get started. Here’s the steps to follow to start tracking your expenses.
- Decide what method you are going to use to track your expenses. Your options include:
- Notebook and pen – I hope you like to write!
- Printables – There are a few printables from around the web that you can download and use. I like this one here, but I personally find it too time consuming to write them all down and total them up.
- Spreadsheet – I have created a spreadsheet for you to use that lines up with the income and expense categories on the budget spreadsheets I will be sharing with you in the next class. So, my spreadsheet is pretty great, but I still recommend option 4 below. This spreadsheet worked great for me when we were living in Asia and I had expenses in both U.S. dollars and Chinese Renminbi/Korean Won and couldn’t import my transactions using a software program. Ignore the salary & wage detail at the top (you’ll use this after you’ve moved on to budgeting and need to total those up as well during the month).
- Budget software – There are a ton of great software options out there and a lot of them are free. I used Mint when I first started tracking my expenses (it’s great for a free option) and now I’m currently using YNAB (I love it). Tomorrow I will cover the basics as well as the pros and cons of a few of the more popular online software programs.
- Start at the beginning of the next month unless you are able to go back to the beginning of this month and trace all of your expenses (totally do-able if the majority of your spending is on debit or credit cards).
- Save all your receipts for every single purchase. Receipts for things paid in cash are especially important, since that’s the only backup you have and it’s easy to forget.
- Put on Downton Abbey re-runs to watch while you write down or enter all your transactions (Psych, The Office, Friends and The Gilmore Girls are also acceptable).
- For cash transactions, enter as soon as possible (especially for those little purchases where you don’t get a receipt). This is another reason that I love using a budget software-I have an app on my phone, so I can enter those little transactions right after I make the purchase.
- For debit or credit transactions, enter your receipts or import your transactions into your software at least once per week. If you have a lot of purchases, I would start with 2 times per week.
- Reconcile your cash and/or bank account balances weekly and monthly. Check that the difference in the cash that you had at the beginning and end of the week/month is accounted for (within at least a small amount). Reconcile each debit or credit card transaction entered in your notebook/printable/spreadsheet/software with your bank account online (there’s a column to check them off in my spreadsheet if you’re using that). Add any purchases that are listed on your account online, but not yet accounted for in your tracking system (there always seem to be some!).
- Total up the purchases for the week or month by category. This is the point at which you may be very surprised by your spending habits. If you want a head start on the next class, take some notes of where you think you can cut and where you would like to spend more (for example, you may want to spend more on groceries to eat at home and less on eating out at restaurants).
That’s it! Just do it friends – you’ve got this! It really doesn’t take up that much time as long as you keep up on it and it’s something you can do while you watch TV. No excuses! Did I mention this is going to change your life?!
EXAMPLE: THE SMITH FAMILY
The Smith family (profile here) tracks their expenses for the month of January. There are no major holidays, birthdays or big events in January so this is a somewhat typical month for them. They use the spreadsheet and they find that overall their spending is about what they thought it was, except that they’re spending a LOT of money on food-both groceries and eating out each month.
After this first month of tracking their expenses, the Smiths have decided that they have a good idea of which categories they use and how they want to track their expenses (they’ll be breaking out the “Eating Out” category into several categories). They’ve also decided that they’d like to set up their categories in personal finance software so that they can import their bank account transactions.
Your homework assignment is to track your expenses initially for one month.
- IMPROVING– Set up an account in Mint and link your accounts that you use for everyday purchases. Mint will automatically assign the expenses to categories for you. Check the balances of the categories at the end of the month.
- INVESTED– Use the spreadsheet to track all of your day-to-day expenses by category.
- UNSTOPPABLE– Set your accounts up in a personal finance software and update balances 1-2 times per week to make sure they are 100% accurate and every single expense has been accounted for.
If you decide to use the attached spreadsheet, you’ll see a “Balance” column. Ignore that for now until you create your budget in the next class and know how much money you have for each category. The spreadsheet will total all the inputs for each category in the “Cost” column. Also, ignore the Salaries/Wages section for now, since we are just focusing on day-to-day expenses first.
Put your monthly expense tracking details and totals (spreadsheet, printout, etc.) in your Annual Budget Binder under the month for which you tracked the expenses.
HANDOUT: TAKE THE FIRST STEP!
Print out this quote and hang it on your wall: