Importance Of Keeping Track Of Your Spending – Regardless Your Income
Every New Year brings along New Year Resolutions. More often than not, one out of three resolutions relate to money management. According to Business Insider, about 80% of the resolutions fail by February. I have found in my own personal life, that there are multiple reasons why sticking to a budget quite often fails. I’ve said it before, budgeting is not fun. But it is an important key for a long-term financial independence. Correct me if I’m wrong, but I think most of us would love to reach to that level of monetary freedom. Perhaps budgeting has such a bad reputation, due to unrealistic expectations and goals. Budgeting does not create more income, nor cuts any expenses. All it does is, it shows on a piece of paper or an app a scenario of what should happen, if you stick to the plan. Learning to control money is vital for everyone, regardless income or cash flow. Actually, controlling and tracking money has less to do with amounts and more to do with control. Having higher income will help to satisfy all our needs much easier, but it won’t make the path to financial freedom any easier. If it did, more people would be retiring earlier than later. Once you have figured out your spending thru tracking, budgeting becomes more straightforward.
Why It’s Important
When I met with my gut doctor the first time, he asked me if I had kept any records of my eating habits. Honestly, that was not something I had even considered. Who had time or energy to write down every bite of food and drink. I sure didn’t think it sounded very exciting. But he explained to me, that without keeping track, it would be really hard to figure out what was going on in my stomach. He also explained that if I kept track, I would see clearer when symptoms arose, and I’d know what was causing my problems. I learned this principle to be true with money management. It might be hard to know how much money we are actually spending, if we don’t keep track. You might discover, like I did, when I started keeping track of my eating, that you are spending more money on things you didn’t realize you were. Keeping track makes us accountable for our actions and choices. You’ll start seeing the possibilities in varies areas of your expenses that you may have otherwise not have discovered. For instance, if you are spending all your money on eating out without realizing it, you may fall short on grocery money. By tracking and changing, you’ll feel more in control rather than allowing the money to control what you can and can’t do.
Tracking Your Spending
Keeping track of your monthly reoccurring bills are easy. You know what to expect there. Your rent or mortgage will most likely stay the same every month. Utilities, car payment and insurance will only change if you make any changes. But everything else is flexible spending. This is where the bulk of your tracking needs to take place. It is the small spending that sometimes breaks the camels back. Using the same example as my gut, I discovered it was the little things that were causing big problems. Small bites such as food samples at the grocery stores. Tiny bites of food were creating major inflammation in my system. This is exactly how spending works. Small, insignificant amounts ($1-2) that all add up to a lot of money at the end of the month. It all boils down to trying to figure out how you can curb your spending to reach your financial goals. It’s not enough to know that I spend $100 at Costco, if I can’t remember what I bought. It could be 10, 15 items or only one item (sounds familiar?). Tracking is the only way to catch non-essential spending. I’ll let you decide what is not essential. I know for our family for instance, orange juice is not an essential item, but milk for my teenage boys are. Buying a frozen pizza is not essential for us, but bread and cheese is. I think you are seeing my point.
There are few methods that can be used to keep track of spending. I have these options, but I am sure there are other tracking means. The important thing is, to keep a record of all your expenses, so that it gives you a better understanding of your own spending habits. When you think of your finances, realize that it is unique to you, just like our circumstances are all unique. Keeping track of everything can be really challenging depending on our circumstances. Some may use credit card statements, some might use cash only, while others may use a mix of both. I have used four different methods in keeping records of our spending. The Envelope System, Credit Cards Statements, Apps and a small Notebook. Each one of them have had their set of advantages and disadvantages.
The Envelope System
Long before I heard it from Dave Ramsey, my little old grandma used this system, in her “special” way. She taught me after I got married, that the best way to keep track of money, was by keeping cash on hand in different chest of drawers. Seriously, instead of envelopes my grandma stashed her cash in her drawers for different spending. I thought the little old lady was weird. I could go on talking about the advantages and disadvantages of money in her drawers, but I’m not. Instead I’m going to explain real quick the idea behind the Envelope System. You pretty much decide an amount for each category, such as food, gas, clothing, fun and so on. You then place the cash in each envelope and use only that amount that is in that envelope for that month. Once the amount is gone, you are done spending money for that particular category.
Pros: Once your money is gone, well, you are done. This system forces you to plan before ever leaving your home for a shopping spree, and that avoids all kinds of impulse spending.
Cons: You have to carry large amounts of cash. Harder to shop bargains when they show up, such as case-lot sale or heavy discounted products, if you have ran out of your cash. Not possible if you do any online shopping or paying for other necessities online.
Credit Card Statements
Using credit cards gives us a monthly statement which shows all the stores and services we used during the month. This tracks spending very accurately. Basically if you can control your spending, there are some great advantages.
Pros: Build a credit score in case you need a loan for a mortgage for instance. You get cash rewards or great kickbacks. Your purchases are protected, such as extended warranty or proof of purchase. Don’t have to carry cash around.
Cons: Easy to overspend. If not paid off in full, can end up with major debt and real high interest charges. Simple to impulse shop without any regards whether it’s a need or want.
Use of apps have become as common as was for people to stash their money in their mattresses 100 years ago. If you have a smart phone, which most people do, then you can download a free app that will track your spending. I tried the Mint app, which is totally free, but that is as far as my experience goes. There are dozens of other free or inexpensive apps out there that can help to track your spending. Each one of them have their strengths and weaknesses. Like any other system it does have it’s pros and cons.
Pros: They connect to bank, credit unions and all financial institutions which makes it real smooth for tracking. The app usually puts your purchases in categories which gives you the ability to know where your money is going. Some of the automatic features can act as a receipt.
Cons: Several to choose from, might get overwhelming for some.
Notebook + Pen
The old fashion way of keeping records of everything you spend. Able to write it down, just like a checking account ledger. Some feel like using a debit card and keeping a ledger works just as well.
Pros: Simple way to track your spending. Writing things down actively effects the way we think about our purchases. Our brains registers in a whole different way.
Cons: Time consuming. Have to carry a small note book and a pen with, or keep hold of every receipt until recorded.
Like I mentioned I have tried all these ways to control our spending. For me the easiest and most useful method was a simple notebook and a pen. I felt like only using credit card statements didn’t help me much, as far as remembering the detailed purchases. The app was too complicated for me, and I never got comfortable walking around with a lot of cash. For about six months, I kept a record of all our expenses and charges. Each month I would calculate the total of each category, and that would give me an idea on what to cut back on the following month. By keeping track of our spending I learned our personal spending habits and needs. It also taught me self-control and being able to forecast our necessities (to some degree). After doing this for some months, it was lot easier for me to create a budget and stick to it.
Use whatever system that works best for you or your family. Just remember whatever method you decide to use, the only way you’ll see the long-term effects are, if you actually stick with it. You may have to try all four methods, like I did, and that’s totally okay, just keep tracking!!”
You must gain control over your money or the lack of it will forever control you”.