I’m not a big fan of traditional budgeting. I don’t keep a budget myself and I don’t recommend that people try to hold themselves to a strict budget.
But I do track my spending. Every single week and every single month like clockwork. And I think that anyone who’s serious about taking control of their financial situation should do it too.
In fact, I think it’s quite possibly the most important financial habit you can create. Here’s why.
First, progress requires BOTH a goal you want to reach AND an understanding of where you are now. Without either of those, it’s impossible to know which actions will truly move you in the right direction.
For example, let’s say that you want to put $200 per month towards your emergency fund. That’s a great goal, but can you afford to do it? Do you have that much money available each month? And if not, what changes need to be made in order to get you there?
You can only answer those questions if you know how much money you have coming into your bank accounts each month and where it’s going. Without that information, you might set up your $200 savings only to realize later that you’re falling behind each month because you can’t afford that savings without cutting back somewhere else.
Second, once you’ve decided on a course of action, tracking your spending allows you to see whether those changes are actually being made.
Is that $200 per month making it into your savings account each month? And are you actually making the changes in other areas that you needed to make? Are there any consequences to all of this that you didn’t predict?
Getting on track is only the first step. Staying on track is just as important and is a continuous process. Tracking your spending is the key to both.
Here’s how I track my spending and how you can do it too.
Step 1: Sign up for mint.com
It doesn’t have to be mint.com, but that’s the tool I used for years and years and it’s the best free tool I know of.
Basically, Mint allows you to link all of your bank accounts, investment accounts, credit cards, and loans, and then it automatically pulls all of your transactions for each account.
I like it because it makes this process as easy as possible. Instead of you having to manually put all of that information together, it does the work for you.
Quick note: The process I lay out below is a process I complete for all my clients as part of my Financial Home Program (learn more here). I use a different tool that’s similar to Mint but is specially built for financial planners working with clients.
Step 2: Categorize the past 3 months worth of transactions
If you’re doing this for the first time, going back three months is enough to get a good start at understanding your average monthly spending.
Now I’ll be honest: this is going to be a pain in the neck. It will probably take you a while and there will probably be a lot of expenses that you don’t recognize and have to research a little bit.
I wish I had a way around all of that for you, but I don’t. It’s the work that needs to be done.
The good news is that it will get much easier going forward as you make this practice part of your regular routine. I’ll show you how to do that below.
Step 3: Pull those numbers into a spreadsheet
Now that everything is categorized, it’s time to start looking at the big picture. And while Mint is great for those first steps, I don’t think it’s all that great for this one.
I use a spreadsheet to look at this information myself. Here it is: Cash Flow Tracker – Mom and Dad Money.
Start with the Monthly worksheet and populate it by copying the numbers straight from your Mint account and pasting them into the spreadsheet.
For example, let’s say you want to fill in the column for October 2016. Log into your Mint account, click on the Trends link in the menu, and update the During field to reflect October’s dates.
The resulting chart shows you high-level spending by category, but you can click on each category to drill deeper and see your spending broken down by smaller categories. Those more detailed numbers are the ones you want to pull into your spreadsheet.
Here’s a quick video that shows how this is done:
Do this for each of the three previous months. And for every category with $0 spending in a given month, make sure to put a 0 in that cell rather than leaving it blank. That will matter later on.
Quick note: If you’re finding this article several months after it was published, you’ll need to update the dates at the top of the Monthly worksheet to reflect the three most recent months.
Step 4: Look at your average spending
Once you’ve filled in the spreadsheet with your past three months worth of income and expenses, it’s time to move over to the Averages worksheet.
This shows you exactly what you’d expect based on the title: your average spending over the past 3, 6, and 12 months. At first, only the Past 3 Months column will be relevant, since that’s all the information you have. But over time it will be helpful to look at longer trends as well.
This tells you, with certainty, where your money has been going recently. Don’t be surprised if you’re completely surprised by some of the numbers. That’s totally normal. Unless you’ve been doing this for a while, you’re almost certain to be in for a shock.
Right now, your job is to do the following things:
- Don’t judge yourself. There’s no need to feel guilty or ashamed.
- Take an honest look at the numbers. Where is most of your money going? What about it is surprising to you?
- Is your money going towards the things you care about? The savings goals that are important to you and the day-to-day activities that matter to you?
- Are you spending more money than you thought in any particular areas you don’t care about?
- Look at the Net Flow row. Is it positive or negative? If it’s negative, that means that you’ve been spending more than you earn and some changes are needed.
- If you have a spouse or partner, share this information with them and start a non-judgmental conversation about it. Here are some tips on how to do that effectively: How to Get Your Spouse on Board with Budgeting.
If you already have a budget, you can enter it into the Budget column of both worksheets to help you look at these numbers in context. If not, you can use these numbers to start creating a budget that makes sense for you and your family.
No matter what, simply understanding this information is the first step towards taking control.
Step 5: Create a weekly habit of categorizing transactions
The steps above will give you a great start. But this is an ongoing process and to really do it right you’ll need to create a couple of habits that help you stay on top of things.
Personally, I’ve been doing this in one form or another for just about 10 years now and I don’t anticipate stopping any time soon. It’s still the habit that does more than any other to keep me in control of my financial situation.
The first habit you’ll want to create is a weekly process of logging into your Mint account and categorizing the past week’s worth of transactions. If you do it weekly, it should only take a few minutes each time since each transaction will be fresh in your mind and there won’t be many to update.
You can set a calendar reminder, use a to-do list app like Asana (one of my favorite tools), or anything else to help you remember and make sure that it becomes a regular habit.
Step 6: Create a monthly habit of updating your spreadsheet
Once per month you can pull the past month’s categorized numbers into your spreadsheet, just like you did in Step 3 above.
The only tricky part here is that in order to keep the Averages worksheet accurate, you need to handle the Monthly spreadsheet in a particular way. Here’s the step-by-step, and there’s a short video below so you can see it in action:
- Open your Cash Flow Tracker spreadsheet and navigate to the Monthly sheet.
- Select all of the columns that are currently populated, starting with Column C.
- Copy those columns.
- Move one column to the right (over to Column D) and paste the data.
- Go back to Column C, update it to reflect last month’s date, and delete all the numbers below (other than the Summary section).
- Now you’re ready to update that new column and the Averages sheet will update accordingly.
Here’s a video showing you how it works:
Step 7: Regularly re-evaluate
Remember that the goal here is to make sure that your money is always going towards the things you care about most. That could be long-term savings goals like financial independence and a house down payment, and it could be lifestyle preferences like travel.
Whatever is important to you, you’ll want to regularly review these numbers to make sure that your money is doing what you want it to do and to make any necessary adjustments.
And while the initial process of working through the past three months will likely be painful, the weekly and monthly habits get easier and easier. I don’t typically spend more than 10 minutes on this during any given week, unless our recent spending has been out of whack and my wife and I need to figure out what adjustments we want to make.
So, good luck, happy tracking, and let me know in the comments below if there’s anything I can do to help!