How To Build A Budget Series Step 2: Tracking Spending
This week here at CleverDude we’re talking about how to build a plan for your money. I’m describing how I manage my finances to provide a blueprint of how to get started getting your finances back on track should you be struggling, or if you’re simply looking for ideas on how to tweak your existing process. Last time I talked about how to get a clear picture of income coming in, and monthly expenses going out. Today we’re going to talk about the day to day spending. It’s about the money you spend on morning coffee, the handful of things you pick up at the grocery store on your way home from work, and that book you bought online. Today we’re going to talk about tracking your spending.
An important component of successful financial management is tracking day to day spending.
Getting Started
Your spending can be tracked using any method that is convenient for you. Some possibilities include:
- Word processing document
- Spreadsheet
- Piece of paper and pen/pencil
- Notepad ap on your phone
You’ll also want to create a list of categories for your expenditures. You can make this as simple, or complicated as you want. You may not start with a complete list of categories, but you can add, subtract, or tweak things as you go. Here are some examples of spending categories:
- Gas
- Groceries
- Household Products
- Restaurants
- Entertainment
- Clothes
How To Track
The goal here is to write down every single purchase, the date, the amount, and assign it a category. The thought behind this is easy, but in practice it’s easier said than done. If you wait until you get home in the evening, you may not remember everything or their amounts. Here’s some tips to help you get everything into your tracking method:
- Keep all receipts, or take a picture of receipts with your phone.
- Enter purchases into a notepad ap on your phone, or text the info to yourself.
- Spend a little time each day entering your purchases into your tracking method
Using the Data
As with the income and monthly expenses we talked about in the previous post, start by tracking every purchase for a month. You can certainly analyze a smaller set of data, but a month does give you a good representative sampling of your spending. Once you have a month’s worth of data, what can you do with it? What does the data tell you?
Total Spending Analysis
The first thing you should do with the data is add up all your expenditures and compare it to the “left over†amount calculated from the last post (subtracting total expenses from total income). If what you spent is greater than what you had left after paying your bills, then you are accumulating debt. That’s a problem.
Comparing your total spending to your monthly left over amount is a good start, but it’s really not enough. This analysis really needs to be done on a budget cycle basis. So, for the time period you selected as your budget cycle do the following:
- Calculate Total Income (adding together green entries from your calendar) for the budget cycle
- Calculate Total Expenses (adding together red entries from your calendar) for the budget cycle
- Calculate left over funds by subtracting total expenses from total income.
- Calculate the total spent (adding together entries from your spending tracker) for the budget cycle
Now, for each budget cycle in the month, compare the total spent to the left over funds. If your total spent is withing the left over amount in each budget cycle, you’re doing pretty well. If your spending exceeded your left over funds in any budget cycle, then you need to analyze what needs to be done differently.
Spending Habit Analysis
Your spending tracker also says a lot about your spending habits. By adding up the total for each category, you will see how much you spend in a given time period on specific activities. You can analyze this data and decide whether it represents how you want to spend your money. For example, you may find that you spent $100 on coffee during a budget cycle. This may surprise you, and cause you to make a behavior change to spend less on coffee. You may see that you spent next to nothing on clothes, and decide that you really need to upgrade your wardrobe.
Tracking your spending is a useful tool in helping to both evaluate your financial health, as well as a way to help identify areas you might want to make a behavior change. Sometimes change is necessary, and you cannot change what you don’t track!
In the first two posts in this series we’ve talked about recording information about events that have already occurred. Next we’re going to talk about shaping and controlling those events. Stop by on Friday to talk about budgeting and planning your spending!
Brought to you courtesy of Brock
Brock is a software engineer by day and personal finance blogger at night. He is a fitness junkie and enjoys grilling and smoking meat. Married with two children, Brock strives to improve his skills as a husband and father, and is always on the lookout to stretch his family’s budget as far as he can.