I believe the secret to achieving financial success is to track your spending. The process of tracking your spending is the only way that I know of that forces you to become aware of how you spend money, and this process is invaluable to learn how to take control of your personal finances. There are many ways to track your spending, but here are the primary ones that I recommend:
Online Tools: There are a lot of online tools that you can use to track your spending. Mint.com is a great example of a free service that will automatically download your bank transactions, and allow you to categorize your expenses. Using an online tracking tool is most appropriate if you tend to use your debit or credit cards for most transactions. You have to manually enter cash transactions, which is a task that is easy to forget. Many online tools are now offering Smart Phone apps that you can use to access your information, and these have made it much easier to track cash expenses. You also have to be comfortable with storing your financial information on the internet. If you are already using online banking, then you will probably be comfortable with this. Be sure you understand the data security of the online tool you are using, especially if it isn’t a mainstream program (such as mint.com).
Manual Tracking: If you are someone that really enjoys the process of writing down and tracking expenses, then using an Excel spreadsheet or even a simple ledger might work for you. Although this tends to be the most time consuming of the options, it may work great for you. You can keep your receipts in a central place, or write down expenses in the ledger on your checkbook… whatever works best for you.
Bucket System: The bucket system is actually a way to budget, but also makes it easy to track your spending. One option is to have an envelope for every anticipated monthly expense, and put cash into the envelope at the beginning of each month. When you need to buy gas, you simply pay for it out of your envelope labeled “Gas.” You can track your spending by knowing how much you have left in each envelope, or how much you had to add to it, at the end of the month. Another option is to have a bank account for your fixed expenses such as mortgage payments, insurance premiums, and cell phone bill, an account for savings goals such as retirement or new car, and a final account for variable expenses such as groceries, gas and haircuts. Similar to using envelopes, you can primarily watch your variable expense account to know how much you are spending.
No matter which option you choose, the most important thing is to find the way that works best for you. If it isn’t easy or convenient, it probably won’t get done. Just remember that tracking your spending doesn’t mean you have to be on a budget. It just means that you know how you spend your money, which is the first step in securing your financial future.
So what do you think? If you track your expenses, how do you do it? If you don’t track expenses, what’s stopping you? Feel free to share in the comments section.