Consider this: You’re on vacation with your family at Lake Titicaca. It’s hot out. So, you decide to jump in the lake. But, before you do, you spot a sign. The sign reads:
Caution! Giant killer eels in the lake. They will eat you for breakfast and not even think twice about it. Stay out of the water — if you want to live.
Pretty impactful sign, right? You see, before you had knowledge of the man-eating eels, you were set on enjoying a nice little swim. But, with the knowledge of what going into the lake actually means (i.e., being eaten by giant killer eels), your behavior will most likely change.
Track Your Spending to Gain Knowledge
Simply knowing something can change your behavior. That’s why tracking your spending is so important. When you don’t track your spending, you don’t know.
For now, you don’t have to worry about how tracking your spending will change your spending. Instead, commit to empowering yourself with the knowledge of where your money is going — to know how your money is being spent.
Tracking Your Spending Will SHOCK You
Click-bait headlines aside, the knowledge of where your money goes can be startling (terrifying?). If you start tracking your spending, you’ll be surprised. I promise that you’ll be shocked by:
- How much money you’re spending each year
- How much money you’re spending in the various categories of your life (eating out, shopping, etc.).
You Have No Idea How Much Money You’re Spending
If you’re not tracking your spending, you have no idea how much money you’re spending. And if you think you know how much money you’re spending — and you’re not tracking your spending — then you are wrong. You are simply wrong.
Consider our various financial planning client case studies. Everyone I’ve come across that doesn’t track their spending — but thinks they know what they are spending — is wrong. (They’re usually between 20% and 30% short for any given category.) So, if a client (read: you) thinks they’re spending $70,000 a year, then they are likely spending up to $100,000.
If you still think you know what you’re spending — but you aren’t tracking it — then I challenge you to challenge yourself. Put yourself to the test! Go ahead and track your spending. Compare your actual, tracked spending to what you think you’re spending. I guarantee that you’ll be surprised, and that you’ll be 20% to 30% short.
Knowledge Changes Behavior
Just like knowing what’s in the lake changes your swimming habits, simply having the knowledge of where your money is going will impact how you spend it. That is, if you spend two hours tallying your credit card expenses to learn that you have been spending $1,000 a month at restaurants, you’re probably going to think twice about splurging the next time you go out to dinner. (Or, maybe you won’t go out to dinner at all.)
With a historical spending figure of $12,000 a year on dining out seared into your retina, you may decide to take up the lost art of home cooking. (Or, maybe you’ll choose a less expensive restaurant — or pick up a frozen dinner from Trader Joe’s.)
Either way, being conscious of your spending can change your behavior. It is undeniable. You simply can’t have all this information and not do anything about it. Having knowledge influence your behavior is why tracking your spending is such a good habit.
Your Spending May Not Line Up with What Matters to You
Getting information is the critical part. Once you become aware of your spending habits, you’ll likely come to the conclusion that not all of your spending reflects your goals.
This could mean coming face to face with the fact that you’re paying $20 a month for a subscription that isn’t all it’s cracked to be. Or maybe’s it means remembering that you’re paying $250 a month for the swanky gym that you never go.
Why don’t you remember about these silly and wasteful expenses? Well, you forgot about them because they’re billed to your credit card. And you never look at your credit card because — wait for it — you don’t track your spending. In short, the biggest opportunity of tracking your spending lies in cutting out the stuff that you don’t know about, or forgot about it, or never really thought about spending money on. And that’s an easy win.
After all, who doesn’t want to stop spending their limited, hard-earned money on stuff that’s not that important to them?
Know Your Spending, Then Act to Change It
With that knowledge of how you are spending your money today, you can take action to spend less on the things that you don’t care about and — wait for it — redirect that money toward the things that matter the most to you.
What matters will vary from person to person. Maybe it’s paying off student debt, saving for your child’s college, launching a business, saving for a house, or retiring early.
My Eyeballs Fell Out of My Head When I Tracked My Spending
I know from personal experience that tracking spending is impactful. This is because I endured the same steps I am suggesting preaching here.
Recently, I pulled up my bank accounts and credit card statements for the first quarter of 2018. I tallied all my expenses in what is my favorite piece of software — a snazzy program called Excel. (But for our clients, we suggest they use our client portal because it makes the process of tracking expenses easier.) From there, I was able to look at the numbers.
What did I find?
I found out I was spending a lot of money on vacations.
Do I enjoy vacation?
Of course!
Will I continue to pay for it?
Most likely.
But, with the sizable price tag of this line item staring me in the face, I can’t help but think about it. And I can’t help but think that there is likely a way I can enjoy vacations while paying less going forward.
UPDATE: Our next vacation will be in Southeast Asia (Thailand, Vietnam and Cambodia). Airfare will be provided by points. Lodging will be paid for with a mix of points and cash. And the airfares in Asia will be a deal! I can’t wait for this awesome budget vacation!
A Young Professional Tracks his Spending
If millionaires, man-eating eels, and your humble author’s experience tracking spending aren’t enough to convince you of the value of tracking your own spending, consider one more example.
Recently, we had the pleasure of working with a young professional — an engineer in industrial design who was making a decent living in his field. But, like many working Americans, he was spending every single penny he earned. And, like most Americans, he wasn’t very happy about it.
He wanted to save money. So, at the start of our financial process, he committed to doing just that: saving more money.
Of course, many people will state their commitment to saving money. Will he be able to do it? Yes! He is already succeeding because he did the one thing that separated him from the pack. He tracked his spending.
Just like everyone does when they track their spending, this young professional was surprised at how much he was spending his hard-earned money — and what he was spending it on. As with many folks, this gentleman’s biggest expense was eating out. He was spending over $700 eating out every month without even knowing it. (Or rather, he didn’t know it until he tracked his spending!) Keep in mind, this was $700 eating out each month for a single person — not a couple, and not a family.
Let that sink in for a second. I’m going to come back to the sentence one more time because I think it’s important.
He was spending hundreds of dollars eating out every month
WITHOUT
EVEN
KNOWING
IT.
With this new knowledge of his spending, he was determined to reduce his restaurant bill and save toward his goal of home ownership.
How to Track Your Spending
Hopefully, by now you’re convinced of the value of tracking your spending. Now let’s discuss how to do just that. When it comes to tracking your spending, there is more than one way to skin a cat:
- You can be old school and do it with pen and paper.
- You can use any number of online apps and tools like Mint. (For our clients, we use a tool similar to Mint.)
- Or, if you’ve got all your spending coming from one place, such as a single credit card or a single checking account, then you can just pull up your statements to see your spending.
- And finally, for those obsessive control freaks who must be able to make each and every single category on their own, there’s Excel or even Google Sheets.
Sunday Morning Money Reviews
Yes, there are many ways to track spending. But as with any goal, it helps to lean on an accountability buddy. For those partnered, the ideal accountability buddy may be your spouse.
Taylor sets aside every Sunday morning to go over his family’s spending for the week with his wife. Does it happen every week? No! Is it perfect? Probably not. But it works. Knowing where his family’s money is going helps the Schultes steer their spending toward the things that are most important to them.
Tracking Your Spending is NOT Budgeting
Most people hate budgeting. There’s a good reason for that: Budgeting sucks.
And that’s where I’ve got good news; tracking your spending is NOT budgeting. And, tracking your spending is BETTER than budgeting.
Budgeting is Constrictive
There are lots of problems with budgeting. To start with, budgeting commits you to a specific dollar for each and every category of your life. Budgeting says:
“I can only spend $100 this month on eating out.”
And that’s not any fun. No one likes to have restrictions hanging over them. Fortunately, tracking your spending is nothing like that.
When you track your spending, there are no limits. There is only knowledge — the knowledge of how much you’re already spending. And you can do whatever you want with that knowledge. You can be at peace with that knowledge, i.e., your spending. For example, I’m okay with spending $169 a month on Brazilain jiu-jitsu. That’s because I get a lot of value out of it: fitness, discipline, a big challenge, etc.
Of course, if you’re not okay with a particular area of spending, you can put a plan in place to make a change. (E.g., I’m going to drive my current car into the ground because I hate having a car payment.)
Alternatively, you can simply make a different choice when you have the opportunity to spend. (E.g., I don’t need to buy this 20-year bottle of scotch.)
Budgeting Can Make You Spend Too Much Money
Another problem with budgeting is that budgets inflate your spending. A budget instructs you to spend “X” dollars per month on category “Y”.
For example, perhaps your budget suggests a limit of $100 a month on eating out. If you create that budget, your spending on restaurants will always bump up to that $100 figure. That is, if you tell yourself that you can spend up to $100, you will spend $100 — and rarely anything less.
In short, don’t create artificial ceilings for your spending. (That’s what budgeting does). Doing so will encourage you to get as close as possible to that artificial ceiling and spend as much money as possible.
Budgets Take Your Eyes Off the Prize
Thirdly, budgets are problematic because they distract you from your goal. And in case you forgot what your goal is, it’s this:
Save more money.
Instead of simply focusing on saving money, you become distracted by the various artificial spending ceilings you’ve created for each category. When you track your spending, your thought process is:
Wow! I can’t beleive that I’m spending $9,000 a year on car ownership. I wonder how I can decrease this. Maybe, I should re-shop my auto insurance policy. And I should definately drive my current car into the ground!
But, when you create a budget, your thought process is:
Ok. I’ve got $9,000 a year to spend on car stuff. My lease is up this year. What other car can I get to keep me within my budget of $9,000 a year?
If you set a budget of $9,000 a year, you will spend $9,000 a year. If you simply tally your spending to learn that you’re spending $9,000, you’ll likely work to spend less. In short, tracking spending keeps you focused on saving money, which is the whole reason we’re doing this exercise in the first place!
Save More Money by Tracking Your Spending
No matter how you track your spending — be using online software, a spreadsheet, or old-fashioned pen and paper — this one act will unavoidably help you save more money. Tracking where your money goes will also allow you to spend money on those things that matter the most to you.
I invite you to review your spending regularly. Monthly reviews are a great place to start. (Weekly works great too!) Reviewing your spending regularly will allow you to see patterns in your spending. It will empower you with the knowledge of where your money is going.
Once you know your spending, you can decide if it lines up with your values and your goals. And if you want it badly enough, you can make a change.
You work hard for the money you earn (or you’ve earned), so why not make the most of it? Tracking your spending may be a pain, but it will change your financial life forever.
