In line with our how-to-budget pieces, today we're looking at how to monitor your spending. There's no good in building an impressive budget without keeping track of whether you're sticking to it or not. Yes, it might sound tedious, but it is always worth it, especially during the festive season when things tend to get a little out of control.
Paving the road from good intentions to excellent outcomes, tracking your spending is imperative.
Why tracking expenses is important (use your bank account to save money)
Before we get started, let's first cover the bases of why this step is so vital. First and foremost, it's essential to hold yourself accountable to your proposed budget. There's no good assigning each dollar you earn to a specific function only to disregard the budget entirely and spend impulsively.
If you're not tracking your expenses you'll land up in square one where you started a month ago. Monitoring your spending habits will show you exactly where your money is really going, and help you to make more informed decisions. The best part is that after a month or two you will get the hang of it and the process will become a lot less tiresome and feel like more of a habit.
Keeping an inventory of your expenses (and income)
First, you'll need to create your budget. Once this is established and the time frame you've set it out for has started, it's time to get tracking. You can do this through a budgeting app, a spreadsheet, or a piece of paper if that makes you most comfortable.
Step 1: track your income
In your income section, confirm all income in the columns provided. If you make money in an unexpected avenue, be sure to add this in too. This step is particularly important for those that earn irregular income through freelancing or side hustles.
Ideally, you would have listed your income avenues as a low estimate, so revel in adding the higher amounts into the columns provided. You can then enjoy reallocating those funds to various items in your expenses column. Don't think you need to be a robot with your finances, you're allowed to enjoy them too.
Step 2: track your expenses
For this step you need to track every single time money leaves your account. For the entire month. From emergency fund allocations to debt payments to monthly expenses, and any payments on a separate spending account. Each time you spend money, record it in the relevant expense categories.
When you buy groceries, add this to your grocery expenses; when you eat out, add this to your entertainment expense. Make sure that your budget is updated to reflect the new total so that you and your checking account are always in the know.
For example, if your grocery budget is $100 and you spend $23, add the $23 as an expense item under the title and ensure that your new grocery total reflects as $77.
There are plenty of expense tracker apps out there if this helps you stay on track. If you are using a budgeting app be sure to check in and review how each category is doing so that you can make informed decisions on what you spend your money on.
Step 3: make it a habit
You might like to do this daily or biweekly at first until you get the hang of it. Make yourself a nice cup of tea and make it a pleasant habit, instead of something you resent and put off. Understanding your cash flow is imperative to understanding your spending patterns and to better manage money. This is where the magic happens (and how financial goals are achieved).
Different methods of tracking your expenses
Below we outline the four most common methods used to track expenses, looking at the advantages and disadvantages of each of them. Whether you prefer paper receipts or accounting software, settle for the expense-tracking method that works for you.
There's nothing wrong with the old-school pen and paper option, if this feels right to you then go for it! Make sure you store it in a safe space.
Advantage: studies suggest that writing things down increases your retention of the information and boosts your ability to make more informed decisions. While typing is probably the preferred method, writing is actually more efficient when it comes to learning.
Disadvantage: this option is more time-consuming and will require you to physically remember all your purchases and retain your slips. Alternatively, you could sit with a printout of your bank accounts and manually write out each expense.
2. The cash process
This step requires you to withdraw the cash outlined in each budgeted category and store it in an envelope. Every time you make a transaction, you use the cash from the relevant envelope and replace it with the receipt. For debit orders, you can use your imagination. While the envelope method might be considered an old-school option for money management, if it works for you then go with it.
Advantage: using this method of tracking monthly expenses you can physically see how well your budget is going and how much you have left to spend.
Disadvantage: in these modern times paying with cash isn't always very practical.
Probably the more common option when it comes to tracking your expenses, using a spreadsheet can be practical and it does the maths for you.
Advantage: with tons of templates, the ability to quickly customize or revise your budget and the automated calculator, spreadsheets are a great option.
Disadvantage: you'll need to physically sit down with your laptop when tracking all your transactions. This will become more challenging the longer you leave it so ideally you;ll need to make this a daily occurrence. Remember, without monitoring your expenses your budget is simply a plan.
4. Budgeting apps
There are several budgeting apps available (for free) that can link to your bank account and automatically track all your expenses.
Advantage: It's all done for you, in real-time. Some apps might require you to assign the transaction to a category while others might automatically categorize it for you, either way, it requires minimal effort and can be regularly updated.
Disadvantage: You still need to monitor your spending, even if you're not physically putting it in. If you've reached your grocery budget, you need to be aware as the app is not going to cut your spending for you.
Whichever method you opt for, tracking your expenses is imperative to sticking to your budget and getting you one step closer to your financial goals.
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