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Updated: January 19, 2021
Once you’ve thought about your “why” behind wanting to improve your financial position, it’s time to start taking action towards it.
First things first: you need to evaluate your current spending habits. You can’t improve or achieve a goal if you don’t know where you’re at and where you’ve been. Tracking your spending is the #1 way you can start to improve your spending habits, because it shows you where your money is going and what you’re currently prioritizing.
And no judgement here! We’ve all made purchases or have spending habits we’re embarrassed by when we look back. The important thing is that you’ve identified that you want to improve, and you’re committed to it now. No matter how deep you’ve dug yourself in debt, and no matter what your current spending habits, you can still climb out and achieve your financial goals.
This Article is for You If…
- You tell yourself you will save what you have left over at the end of the month, only for the end of the month to arrive and you realize you have no money left to save.
- You find yourself spending more than you earn, and funding purchases with credit cards or student loans.
- You find yourself not knowing where you have really spent your money over the course of the last month.
- You are unaware of how much you spend on eating out, clothes, or transportation.
- You leave stores with more stuff than you intended to buy.
If any of the above are true, this article is for you! Again, no judgement. When I was in college, I would easily spend hundreds of dollars a month on eating out, alcohol, and traveling. I never really kept track of how much I was spending, and I saved anything “leftover” (usually nothing). Now I cringe thinking about how much more money I could have now if I would have committed to a monthly savings amount, and then used “leftover” money for the fun stuff. But the important part is that I corrected my course, and that’s what I hope you get out of this article today.
Track Your Last Few Months of Spending
The first step is to track the last few months of your spending. A lot of people stop here because they think this is something that takes a lot of time. However, it doesn’t have to!
You can either track your spending manually on a spreadsheet or via a Mint or Personal Capital account (or you can use both methods, if you’re a nerd like me). You don’t even have to build your own spreadsheet—you can download mine for free.
If you already have a tracking system set up, you’re ahead of the game. If not, go ahead and compile your last few months of spending history.
Another spending tracker I’ve recently discovered is an app called Charlie. Similar to Mint or Personal Capital, it allows you to link accounts and track your spending. It goes one step further and gives you budget notifications and recommendations based on your spending.
Option 1: Manual
The first option is manual tracking. While this is not absolutely necessary due to spending trackers, it still has its benefits. There’s something to be said for having to actually categorize and type out your spending history. It forces you to think about each purchase and whether it was really worth it.
For example, an automated spending tracker can quickly show you that you spent a total of $500 eating out in a month. But manually tracking your spending makes you realize that $150 of that $500 was spent in one expensive meal, and it makes you think about whether that meal was worth that much to you (maybe it was, maybe it wasn’t).
You can download my spending tracker spreadsheet here.
Option 1.5: Make your own spending tracker app
I recently came across a great idea on a blog called Waffles on Wednesday. This is a semi-manual, semi-automatic way to track your expenses.
Basically, you create a google form that allows you to fill out the expense and category. You can connect this google form to a spreadsheet, which is automatically updated every time you fill out the form in the future. Then you save this form to your phone home screen and essentially create an app. Voila! Every time you make a purchase in the future, you can just fill out this nifty form and it will automatically send it to your tracking spreadsheet!
Option 2: automated spending trackers
If you dread tracking your spending to the point of procrastination, you’re much better off using a spending tracker such as Mint or Personal Capital. Again, I do both. I think both methods have their benefits. For example, the spending trackers have different visual graphs that makes it easy to see at a glance where most of your spending is happening.
If you are unfamiliar with how to use these to track your spending, I walk through it step by step in my course.
Set up a Sustainable System to Track Spending
Whatever option you choose, make sure you continue tracking into the future. This will happen automatically if you’ve linked accounts to a spending tracker (but make sure you link any new accounts or loans in the future).
If you choose to track your spending manually, make sure you set up a time when you will consistently enter your spending. I choose to track my month’s spending on at least the 15th and last day of the month. On the 15th, I can see how much I’ve spent in each category so far, and know that I can expect to spend double what I’ve currently spent by the end of the month. If I’m not happy with that number, I know I need to adjust my spending for the rest of the month. The more you struggle to manage your expenses, the more often you should track.
Evaluate Your Spending Trends Against Your “Why”
The final step is to start evaluating your current spending habits against your “why.” After tracking your spending for a couple of months, some patterns should become evident. What categories are you spending the most money? How much do you cook your own meals or eat out? What are your largest recurring costs (loan payments, housing, transportation)? Do you have subscriptions or spending you weren’t even aware of?
Now think about your reasons for wanting to improve your financial position. Think about how your life will change once you’re able to save more money.
As you track your spending in the coming months, begin to ask yourself if your purchases are part of your ideal financial picture. And ask yourself if your spending aligns with your values. If your ideal life consists of traveling the world and living out of a backpack, why do you spend hundreds in clothes every month? If your ideal life is being able to spend your time with your kids, why are you spending hundreds on a car loan or going out to eat?
Ask yourself if each purchase is worth setting you back in terms of reaching your long-term goals. Every $100 of unnecessary spending is another $100 you have to earn (actually, more like $125 you have to earn after factoring taxes). As you start to save money, you will start to ask yourself if all of your purchases are worth dipping into what you are working so hard to achieve. You must guard your finances and freedom.
It’s okay if you’ve never evaluated your spending against your values. I didn’t until I read the book Your Money or Your Life. That book made me ask myself why I was spending hundreds of dollars on new clothes each month when I really didn’t value clothes at all. It all comes down to personal choices. I won’t ever tell someone that their spending is wrong. It may be wrong for me, but right for you. For example, clothes and fashion may be something you really value, but you couldn’t care less about eating out. Just make sure your spending aligns with your values, and that you recognize the person behind your spending.
What’s your method for tracking your spending? What did you discover about your spending as a result of tracking it? Share in the comments!