No matter how many budgets you create, your financial health likely won’t begin to improve until you consistently follow them. The best way to make sure you never go over your budget is by tracking your expenses.
In this article, we’ll look at five steps you can take to start tracking your finances and creating a system that’s sustainable for you.
How to Start Tracking Your Spending
At some point or another, we’ve all found ourselves wondering where all the money went. Even the smallest of expenses can add up over time if you aren’t keeping a close eye on your spending.
Here are five simple steps you can take right away to start taking control of your money:
- Identify Your Current Expenses
- Categorize Your Spending and Create a Budget
- Record Every Dollar Spent
- Choose What to Do With Your Savings
- Identify Room for Change
1. Identify Your Current Expenses
If you’re ready to start tracking your spending and building your savings, the first thing you’ll need to do is list your current expenses.
Make a list of everything you owe each month including your rent/mortgage, utilities, credit cards, cell phone and other recurring expenses. You can always look at last month’s bank and credit card statements to see exactly how much you spent on each item.
If you have any annual or semi-annual payments, also be sure to list the amount you’ll need to put back monthly in order to make those payments when they’re due. For example, if you pay $600 for auto insurance every six months, plan on putting aside $100/month for those future payments.
Once you know how much you can expect to spend on necessary expenses each month, compare that number to your monthly income. Include your paycheck — after taxes, benefits and other deductions — as well as any other sources of expected income. This will give you an idea of how much money will be going to something other than bills, whether those dollars are going toward another spending category, debt or savings.
2. Categorize Your Spending and Create a Budget
After you’ve identified your monthly expenses, take a look at your day-to-day spending.
How much do you typically spend on groceries, transportation and entertainment? If you aren’t sure, dedicate the next couple of weeks to writing down every dollar you spend and what you bought with it. This will help you get a better idea of how much you spend on average (other than recurring bills) and will show you what you’re spending your money on.
Next, decide on spending limits for the budget categories that make sense for you. Your categories may include those listed above and/or might include pet supplies, travel, crafts or something else entirely. Be sure to make these limits realistic for your lifestyle. You can keep track of your set spending limits and actual spending in each category using our free CLARK Method budget worksheet.
For more details on how to use this worksheet (and to download it for free) check out our guide to using the CLARK Method to create a monthly budget.
3. Record Every Dollar Spent
Once you’ve created your budget, the most important step is to follow it. Record every dollar that you spend and indicate what category that purchase falls under.
The best way to track your spending is to use a system that works for you so that you’ll keep using it. You may want to create a cash envelope system, use a program like Google Sheets or download a well regarded budgeting app.
Cash Envelope System
Carrying a limited amount of cash is a great way to avoid overspending and stop yourself from reaching for that credit card. One effective way to track your spending is by setting physical spending limits for each category using cash.
With this system, you’ll determine how much money you’ll allot for each category, write the category on an envelope, and put the cash inside for that category’s spending. This way, you’ll easily know how much you’re spending on each category and where you can make adjustments. To get started, check out our guide on how to budget with a cash envelope system.
Another way to keep track of your spending is by recording each transaction in a Google Sheet. This completely free and easy-to-use tool provides pre-made budget templates that you can edit to include your budget categories, income and recurring expenses.
The “Monthly Budget” template includes a tab dedicated to transactions. In this tab, you can record any dollar you spend, and the sheet will automatically update your remaining balance in each category. To get started with this template, follow our guide on how to budget with Google Sheets.
Budgeting apps provide another convenient option for tracking your expenses. Typically, these apps will link to your personal bank accounts and help you get an overall picture of where your money is going without you having to enter each transaction yourself.
We recommend downloading one of these top three budgeting apps to get started:
To decide which app is best for you, check out our guide to these three budgeting tools.
Of course, if none of these options seem to work for you, there’s nothing wrong with tracking your spending the old-fashioned way. Carry a notebook and pencil in your car or keep a note open on your phone where you can record every transaction you make throughout the day. When you get home, organize that spending into categories and record it in your budget.
4. Choose What to Do With Your Savings
At the end of the month, you’ll hopefully have some money left over in each category. Decide what you want to do with these additional savings.
If you have money leftover in a category, you can either roll the money over to the next month’s spending limit in the same category or move it to a savings account.
In categories with flexible totals, such as utilities, consider letting the money go toward future payments in the same category to compensate for bigger than normal bills. If you have money left over due to a lack of spending, like in an entertainment or clothing category, think about putting the remaining amount in your savings account.
5. Identify Room for Change
Once you’ve created a budget and begin tracking your spending, take the time to reflect on your habits and identify room for change.
If you can reduce spending in a category like eating out, you can increase your savings quickly over time. Look over your budget and decide if you can lower the spending limits in any category. You can also lower the spending limit if you feel like you’re spending too much money and want to make a special effort to save in that category. It’s much easier to see where you’re overspending when you’re recording each transaction.
Another incentive for identifying room for change comes from setting savings goals. Long-term savings goals are important to include on your budget, but you can also set small monthly savings goals for yourself. As you watch your spending decrease and your savings increase, you’ll be motivated to find even more room for improvement.
You should take the time to reflect on your budget and the spending you’ve tracked at least once a month. As your expenses, income and spending habits change, your budget, spending limits and savings goals will need to be updated. Looking back on your cash flow each month will also help you to identify long-term patterns and more ways to get the most out of your money.
Ultimately, tracking your expenses is a simple thing to do: You just need to write down each dollar you spend. However, the key to improving your financial health by tracking your spending comes with consistency.
To get started, make a list of your current expenses and familiarize yourself with your daily spending habits. With that information, create spending categories (with reasonable limits) to track using your budget.
Once your budget is built, record every dollar you spend in a way that’s convenient for you. As you begin tracking your spending, decide what to do with any remaining money at the end of the month and start identifying room for change. Set savings goals for yourself each month and make adjustments as necessary. Lastly, don’t forget to review your budget and expense tracker at least once each month.