Why Tracking Expenses Is Essential to Developing a Budget

Why Tracking Expenses Is Essential to Developing a Budget

Have you ever found yourself looking at your bank account and wondering why your balance is so low? I’ve had this happen to me at many times in my life, from when I was a college student pinching pennies to when I had a steady job and a paycheck that was mostly going to savings… but I was always saving just a little less than I thought I should be able to.

The first step towards getting control of your finances is figuring out where your money is going, which means tracking all of your expenditures. Ideally you should do this on a daily basis, and you should record every penny that you spend. It’s like balancing your checkbook—you want to be able to account for every cent that leaves your bank account or your wallet.


Why Is Tracking Spending so Important?

Tracking your spending is the first step towards developing a realistic budget, and also gives you the information you need to identify any spending problems or ways that your spending doesn’t align with your priorities.

Tracking your spending will also keep you honest about what categories need to be included in your budget.

Tracking expenditures is especially useful for identifying relatively small purchases that add up substantially over the long run. For example, you might buy your lunch everyday—a relatively small purchase of $6. But over the course of the month (20 work days), you’ve spent $120 on lunch. Does that align with your spending goals? Some other common expenses that are “hidden” for many people are:

  • Parking Fees
  • Gas
  • Coffee or snacks at cafes
  • Cable companies jacking up their rates (and boy do they make a killing if you consider the thousands of customers they hit with small price increases each month)

Basically, any purchase that is less than $10 is likely to fly under your metal radar. But all together, you could be spending hundreds of dollars without realizing it.

Understanding how you are spending your money is the first step towards developing a budget. Budgets should not be ideals—they should be plans that are based in reality. You probably know exactly how much your rent is or how much your pay for electricity each month, but having a realistic budget means accounting for all of your spending.

For some people, a ‘budget’ might convey images of extreme frugality and even deprivation, but that’s not really what budgets are about. Budgets are a tool that help you spend your money in ways that fit your priorities. Understanding your current spending is the first step towards developing a budget that not only reflects your priorities but also reality—which means one that you’re more likely to be able to follow.


The Main Categories of a Budget

A budget needs to include four main categories:

  • Income - what you bring home, after taxes
  • Required Spending (rent, utilities, groceries, insurance, minimum payments)
  • Optional Spending (eating out, entertainment, new clothes)
  • Savings (for retirement, for a big purchase, or paying ahead on loans)

Personal finance expert Liz Weston recommends at most 50% of your income go to required spending, 30% go to optional spending and 20% go to savings. See Liz’s video here.

Making savings a budget category helps you a) be aware of it, and b) commit to putting money aside for future goals like a vacation, retirement, college savings, a big purchase, etc. Not everyone is in a position to save money, but increasing income, or decreasing spending are the first steps to getting there. Savings in its most basic form is living “below your means”. Consider the case where a person has the budget to afford a new car lease. However that person would rather keep their current car which is paid off and put the car payment money into a down payment for a house.


How to Track Spending

Tracking spending doesn’t need to be high-tech, although it can be. The key is to record everything you spent money on at the end of every day. This can be in a dedicated notebook, in a spreadsheet on your computer or using a dedicated app. Each expenditure should be briefly described and assigned a category.

If you share bank accounts with a partner, you should track your spending together.

At Wealth Meta we have a simple low tech solution for tracking your budget - a printable sheet you (and your spouse) can use to track spending. Having your spending on paper out in the open can be a great way to “stay on the same page”. Keep in mind this spreadsheet is designed for basic month to month spending and does not account for one time or annual expenses. Still it will get you started on the right path.

On the high-tech end of this there are many apps out there that help you track spending and setup a budget. Not all are created equal. Many are free but force you to link your bank accounts (making your data the actual product) and include lots of annoying advertising or sales calls. So understand what you are getting into with an app, who has your data, and what they can do with it.

At Wealth Meta we created the Home Budget Tracker to solve the problem of budgeting and purchase tracking once and for all. It is a tool we use ourselves to understand where our money is going and to find opportunities to save. The Home Budget Tracker is designed to be: a time saver, mobile and desktop friendly, very secure, and easy to use.

With Wealth Meta you are NOT the product! We do not sell any data third parties, per our privacy policy, and that is promise. As of May 2018 the Budget Tracker is under development and it will launch in a few months. As for pricing, like everything Wealth Meta - you can expect it to be very reasonable when we do go live.  We'll be in beta for awhile after it launches, and for every month that you are signed up during the beta period you'll get a discount towards a premium membership. 

The post Why Tracking Expenses Is Essential to Developing a Budget is part of a series on personal finances and financial literacy published at Wealth Meta. This entry was posted in Personal Finance
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