How To Track Spending and Budget

Plus Our Tips For How To Do A Spending Analysis

One of the secrets to building wealth is simply to know where your money is going. We track every dollar we spend and, in the year before we became financially independent, we were able to save 70% of our after-tax income. Naturally all of our savings went right into investments, putting us in a solid position to retire decades ahead of the usual age.

For those who have toyed with the notion of tracking and budgeting but have never yet made the leap, we’re sharing our tips for getting in control of your money. Once you know where your money’s going, you can do a better job of spending on the things you value most and saving towards whatever your financial goal might be.

For us, our big goal was to reach financial independence and retire early. And we couldn’t have achieved this without putting in the work of tracking our expenditures, analysing our habits and figuring out where we could achieve savings.

We really feel that tracking your spending and using that information to build a realistic budget is a foundational piece for becoming financially independent or achieving any financial goal. Most of us will never win the lottery or inherit millions so how we spend our money is one of the key ways to manage our finances and ultimately build wealth.

What to track

Let’s start with what you should be tracking…and the answer is everything. You should track all of your expenditures over the course of a month so that you know exactly where your money is going.

Whether you do it in an automated way or manually, tracking is about making sure that every single purchase is recorded, large or small. This means capturing all your spending, all the way down to the coffee you buy every morning.

Your tracking should be broken down by spending category – rent or mortgage, utilities, food, transportation, entertainment and so on — so you can see which categories take up most of your paycheck. All of this might sound like a lot of detail but we’ll share further down how you’ll get a huge return back for all the work you put into it.

How to track

But first, let’s talk about how to track your spending. There are many ways to track your spending so you can easily choose the one that will work best for you.

You can go the analog route and collect receipts or make notes as you spend and then tally everything up at the end of the month. This one is very easy and accessible for anyone to try; you don’t need any special technology. However, it does put a lot of pressure on the activity of collecting receipts or invoices, whether from in person or online purchase, and is the most prone to human error

On the other extreme, you have the fully automated route. There are a number of platforms like Personal Capital or Mint or You Need a Budget that link up with your credit cards and bank accounts and automatically log any purchases you make with them. Once you have it set up, these automated platforms are the absolute easiest way to track your spending.

However, you do need to be comfortable with handing over access to your accounts to a third party, which not everyone is. Also, if you do a lot of spending in cash, you would still need to go in to manually categorise your spending — only credit and bank information is captured automatically.

Another option is a hybrid, which is what we have chosen. We use an app, You Need a Budget, but we decided not to link our credit cards and bank accounts for the sake of privacy and data protection. Instead, we manually log any purchase we make into the app. It takes some practice to make manual logging a habit but it’s a good option if you want to use an app but don’t want to link your accounts.

Now, how long should you track your expenses? At minimum, you should track all your spending over three months so that you can see the trends and patterns. From there, you’ll be in a good position to build a basic budget.

But ideally you would track your spending over the course of a year in order to be sure you’ve captured seasonal and annual expenses. We’ve been tracking our spending down to the penny for over two years and we find that this gives us a lot of confidence in our financial planning.

So we’ve talked about tracking every expenditure and the importance of getting everything categorized properly. So what do you do with all this information?

Analysing your spending

Once you have at least three months of spending logged, you’re ready to dig into the details and really understand your spending. The goal here is to find opportunities to save money on the things you don’t value and put more money towards things that you do. It can be pretty overwhelming to look at months of spending but we have a few tips to make it easier.

Largest expenses

A great place to start is to identify your largest expenses. These vary for everyone but they typically include housing, food, and transportation.

You may view many of these as fixed costs but, in fact, they may be less fixed than you think. As you reflect on these large costs, you may see opportunities to make changes in your life that can come with big savings.

For example, when we started to track our costs a couple years ago, the biggest cost we had to face was our two bedroom apartment, which had one bedroom more than we needed. So we actually downsized all the way to a studio apartment, which came with major savings, not just on rent but on utilities as well.

Of course, it’s not always so convenient to make such a major change and doesn’t happen overnight. But as you look at your largest expenses, consider which of them might be areas of opportunity for you.

Spending habits

As you review your spending, you should also look for patterns or habits. These would be things like buying a coffee or muffin every morning, getting takeout food every Friday night, or buying brunch every Sunday.

These purchases may not come as a surprise to you but the total amount they cost over the course of a month might be a little shocking. As you reflect on the total, ask yourself, was the value of the experience equivalent to what you spent?

Maybe you really enjoy having a coffee from your favourite barista every morning…or maybe it’s not worth the total expense over a month and that’s a habit you’d like to change. Try experimenting: make your coffee at home for a month and see how that feels.

Recurring expenses

The next thing to look for are those automated, recurring expenses. You set them up one time and they’re charged directly to your credit card or bank account on a regular basis. And most likely you never think about the cost again. These could be cable, gym memberships, subscriptions whether to magazines or Netflix or Spotify, telco, insurance. Really, it’s any expense that comes through automatically.

We strongly recommend that you identify all recurring expenses and question whether these are bringing value to your life. Where it makes sense, you should see what opportunities exist to renegotiate or shop around for a better offer.

When we were trying to reduce our costs, we reviewed all the cell phone providers including some new entrants on the market and found a great deal that cut our cell phone bill in half.

Spending binges

The next thing to watch out for are spending binges. These can be due to a planned event, like moving to a new home or going on a big trip. Or they can be a coping response in times of stress at work or home. In any case, these are times when you’ve given yourself permission to spend a lot of money — maybe more than what you’re comfortable with or your bank account is comfortable with.

If you notice that you are prone to spending binges and it’s something you want to address, we suggest reflecting on the circumstances so that you can better manage them in the future.

If you tend to spend a lot on big life events like moving to a new home, consider setting yourself a strict budget or holding off on completely redecorating the whole place in the first week. Or if you need to kit up for a big trip, consider what you can borrow or buy used.

If you tend to go on shopping sprees as a way to manage stress, consider healthy, low cost ways to relieve your stress and get into a better headspace.

Creating a budget

Once you’ve tracked your spending for a few months and analyzed your habits and patterns, it’s time to create a realistic budget — one that you can live with in the long term and leaves enough room for the things you value. And there should be enough left over to meet your monthly savings goals.

Once you’ve created a budget, don’t give up on the tracking. Continuing to track your spending is the best way to know that you’re sticking to your budget and it works with your lifestyle. And don’t forget to revisit that budget every few months to see if it still works for your needs.

Now we’ll share the greatest benefit of tracking your spending. Yes, it’s great to be able to save more and reach your financial goals. But there’s an even bigger payoff.

Relieving money stress

When you track what you’re spending on every month, it can relieve a lot of stress and anxiety. You’ll never feel out of control with your spending or wonder where it’s all going.

You’ll know exactly how much is leaving your bank account each month and whether you’re spending on things that are important to you. And when you have more control over your spending and your finances, you’ll be much better prepared to face life’s ups and downs.

How To Track Spending and Budget