Updated: Jul 9, 2020
The very first thing you need to do to become great at managing money is to track your spending. While it takes some effort, tracking your expenses is a simple process.
Tracking your spending is a four-step process.
Gather all of your bank account statements, credit card statements, and receipts for cash purchases. You’ll need at least 30 days’ worth of expenses.
Categorize all of your monthly expenses.
Use either an expense tracking app or a spreadsheet template.
Evaluate where your money is going and use that information to make changes to your saving and spending habits.
1. Gather all of your receipts and account statements
The first step to tracking your expenses is to gather up the records of all of your monthly expenses. There are three places you will find these records.
The monthly statements for all of your bank accounts.
The monthly statements for all of your credit cards.
Receipts from any cash purchases.
These records will give you all the information you need to track your spending, including the following.
Date of each purchase.
Details on each transition like which store purchase was from and sometimes even the name of the product that was purchased.
It’s also important to remember that you are not only tracking your spending on things you buy, but you are also tracking every penny. That means any fixed costs like rent or insurance and any money put towards paying off debt or saving.
2. Categorize all of your monthly expenses
I believe in keeping things simple. Rather than having a dozen or more categories that your expenses could fall into, I like to categorize every penny into one of three categories.
“The big 3.”
The average person spends between 50%-60% of their money on housing, transportation, and food. Together these expenses make up “the big 3”. The big 3 can also include any expenses you consider to be “essential” like internet and phone costs.
Values are the things that you spend money on that have a real impact on your life. Traveling, giving to charity, and investing in yourself are some examples of value expenses.
Stuff is any non-essential spending that does not make you happy or provide any lasting impact. These can be big purchases like buying a new flatscreen TV, or they can be small, like buying a pack of cigarettes.
3. Use an expense tracker app or spreadsheet
If you Google “free expense tracker app” or “free expense tracking spreadsheet.” You are likely to find many great options. For the remainder of this article, I am going to discuss tracking your spending using the expense tracking spreadsheet I created.
This spreadsheet has a particularly unique feature in that it tells you how many hours you had to work to pay for each expense. By thinking about the true cost of the things you buy in terms of time instead of money, it might help to clarify if you are happy with where your money is going.
Calculating your hourly-take home pay
To determine how many hours you need to work, for each expense, you need to calculate your hourly take-home pay.
To do that, you’ll need to know what your take-home pay is on each paycheck. So, grab your most recent pay stub, which probably looks something like this.
Your total net pay or take-home pay is equal to your gross pay minus all taxes and deductions. It is the amount that hits your bank account on payday.
Once you know how much you clear on every paycheck, you simply need to divide that number by the number of hours you worked during that pay period.
As an example, let’s assume the following.
You clear $1,676 per paycheck.
You get paid every two weeks.
You work 40 hours per week.
That would mean you have an hourly take-home pay of $20.95. The expense tracking spreadsheet I use crunches those numbers for you.
Inputting your expenses
Once you have gathered all of your receipts and account statements and calculated your hourly take-home pay, it’s time to start inputting your expenses.
To get a complete picture of your expenses, you’ll want to input the following information for every expense.
The date of the expense or purchase.
The dollar amount of the expense.
A description of the purchase. This will help you understand what the expense was, for example, you could input “rent” or “coffee.”
Context of the purchase. This is particularly useful in determining if an expense should be classified as “values” or “stuff.” For example, coffee might be classified as “stuff” if you bought it because you forgot to brew your own. On the other hand, if you purchased a coffee while catching up with a close friend that might be classified as “values.”
Classification. Classify the expense as big 3, values, or stuff.
4. Evaluate where your money is going
Once you have inputted all of your expenses into the expense tracker, it will look something like this.
The expense tracker will tally up all of your expenses and tell you how much money you spent on the big 3, values, and stuff. More importantly, it will show you how many hours you had to work to pay for those expenses. In this example;
$2,239 spent on the big 3 means you would need to work 107 hours to pay for these expenses based on the $20.95 per hour take-home pay calculated in step 3.
$850 spent on values means you would have to work 41 hours.
$550 Spent on stuff means you would need to work 26 hours.
The same calculation is made for each individual expense you enter. This way you can easily see that the true cost of your car payment is not $500, it is the 24 hours you need to spend at work to make that car payment.
Use this information to make changes
Once you figure out where your money is going each month, and you learn how many hours you are giving up for the things you buy, you simply need to ask yourself if you are satisfied with your results?
If the answer is yes, then odds are you are pretty happy with the current state of your finances.
If the answer is no, then it’s time to identify the source of the problem.
The low hanging fruit would be to minimize the amount of money spent on “stuff.” Redirecing money from stuff to “values” is a good first step.
However, if you want to get serious about saving more money, the odds are that you’ll need to reevaluate how much money you are spending on the big 3 as they account for the majority of your budget.
If you have rooms in your house you’re not using, you might consider renting them out to generate income or downsizing your home.
If you’re a two-car household, ask yourself if you would be willing to become a single-car household.
If you’re shocked about how much you are spending on groceries, you might consider making a weekly meal plan based on what is on sale at your grocery store.
The more money you can save from stuff and the big 3, you can be redirected to things you value. These can be “financial values” like paying off debt or “personal values” like traveling more often.
If you’re only spending a fraction of your income on things that you value, odds are you are not living an intentional life. The goal should be to align your money with your values as much as possible.
Tracking your spending is the first step to becoming a great money manager
If you want to turn your finances around, the first thing you need to do is track your expenses and figure out where your money is going every month. Start by compiling the records of all your expenses, including bank and credit card statements, in addition to receipts from any cash purchases you make.
Next, you’ll need to define how you will categorize your expenses. I like to keep it simple and categorize all expenses as either the big 3, values or stuff.
Then you will need either an app or spreadsheet to organize your spending and present it in a way that will help you make the right adjustments. You can find plenty of free resources on Google or use the spreadsheet I have built here.
Then it’s simply a matter of inputting all your expenses (at least 30 days worth) and evaluating the results. Often times, there will be obvious areas of overspending that stand out instantly.
Ask yourself if the way your spending your money makes you happy and helps you to lead a fulfilling life. If the answer is anything but a resounding, “yes,” you know you have some work to do.
If you're ready to master your money, don't forget to enroll in my video-based personal finance course, "Millionaire In The Making: The 30-Day blueprint" Click here to enroll.
This article is for informational and entertainment purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any significant financial decisions.