When you feel financially out of control, the knee jerk reaction is to cut back. But without insight into where your money goes each month, extreme budgeting leads to a harmful cycle.
You feel good initially. You’ve committed to spending almost nothing until you feel in control. A feeling of deprivation sets in as your willpower wanes. You think, “I’ve been so good this month. I deserve to go out tonight.”
Out you go, feeling flush with the cash you saved, to spend way more money than you would normally. The next morning you feel gross, and not just because of your hangover. Maybe you think the answer is to cut back your spending even more.
The cycle continues.
To avoid yo-yo budgeting, you need to find out where you spend your money. You track your finances first to create a budget rooted in your financial reality.
Tracking your finances gives you a baseline to help track your progress. As you retire bad spending habits, you can easily chart how new ones benefit your balance. That positive feedback loop will motivate you to continue building more and better habits.
Why We Don’t Track Our Spending
Discovering where your money goes is an eye-opening experience. I’d go as far as to call it enlightening.
But it can be really scary to be honest with yourself. If you think you’re a responsible person, but discover that you’re spending irresponsibly, that truth is disconcerting.
The worst that can happen is you feel embarrassed for a minute. I give you permission to be morose for a whole day if your habits seem that bleak to you.
After that, you should give yourself some credit, even if you still feel stupid for spending so much on designer socks and 7/11 hot dogs. You now have the information you need to create a budget that helps you save money without feeling deprived. That’s something to be proud of.
Track Your Spending
Most people track their spending one of two ways: as they go, or in regular batches. Both are equally effective, so don’t stress. Choose whichever method you like best.
Track As You Go
How It’s Done: Any time you buy something, take a second to document the total cost, the place of purchase, and the spending category.
You’ll want to save receipts and jot down any cash purchase details in a note on your phone or a small notebook. At the end of each day, transfer this information to a spreadsheet or tracking program.
Pros: Evangelists of this method find that it helps them save money immediately. Recording every transaction makes them more likely to rethink unnecessary purchase like drugstore gum or afternoon coffee.
Cons: This method can feel tedious. Manually tracking every single transaction may freak you out if financial stress already has you on edge. If you feel this way, don’t worry. We’ve got you covered with regular batch tracking.
Regular Batch Tracking
How It’s Done: First, find an online tool to track and categorize your purchases for you. Simple has built-in tools to help users assign transactions to categories. Read more about using Simple to easily track your spending.
Then, set a recurring event on your calendar on a day you’re regularly free. You’ll use this time to check on your account and make sure everything is categorized properly. Personally, I take 30 minutes to an hour every Monday evening to look over my transactions and make edits.
Once you’ve done that, there’s nothing else left to do. Really. Go spend your money like you would normally.
Pros: It’s easy to track your finances this way. Batch tracking doesn’t interrupt your life beyond the quick check-ins.
Cons: You still have to manually document cash purchases, and if you spend from more than one account, set-up and tracking may take more of your time. If possible, commit to using one card and avoid using cash while you track your finances.
How Long Should I Track My Finances?
Tracking your spending for 30 days will give you a good sense of where your money goes each month.
Note: This assumes that you’re spending normally.
Sometimes we have one-off expenses, like car repairs, taking a vacation, or making a big credit card payment. In this situation, it makes sense to track your spending for another month or two to figure out what “normal” spending habits look like for you.
You may find that you really enjoy tracking your finances. That’s awesome! Just make sure you’re using that information to inform your budget and how you spend in the future. Information is important, but it’s not as important as what you do with it.
Tracking your finances for a month is a helpful exercise any time your financial situation changes. Events like getting a raise, adding a member to the family, or kicking off a freelance career will all change your finances enough to merit a check-in so that you can adjust your budget if necessary.
I challenge you to track your spending for the next 30 days. Send this post to someone you trust who will keep you accountable. Let them know that you’re serious about changing your spending habits, and ask them to check in with you periodically to see how it’s going.
As you’re going through the process, I want you to think about what you notice. How do your feelings around money change? Do you experience any immediate changes in your spending habits? How do your friends respond to what you’re doing? Let us know your insights on Twitter or Facebook.