Learning how to track expenses can help you to master your finances. This was, hands down, the best thing I ever did to fast-track my journey to financial freedom. Yes, more than budgeting!
Do you really know how much you spend every month eating out? Or on your groceries?
I mean, really know. Not “I think I kind of know, because at the end of the month, I haven’t got much left in my pocket” kind of know.
I have been there.
I thought I was a pretty good saver and knew exactly where my money went.
But it was only when I started tracking expenses that my financial life changed.
Now I track my expenses every month.
Once a new month starts, I sit down with a nice cup of tea, open my spreadsheet, and start tracking where my money went the month before. I download my bank statements, edit a few bits of information, categorize them, and compare them to the previous months. It takes me less than an hour these days.
It’s incredible how something so simple can change your relationship with money.
I realized how much this step helped me in my journey to financial freedom only a few years ago.
Every time a friend asks me how to improve their finances, no matter if they want to get rid of debt or save a bit more, the first step I suggest to them is to take is always the same: tracking their expenses.
And yes, this comes way before budgeting. I do, in fact, think that budgeting can be a bit boring. And if you tried budgeting in the past and gave up, you know exactly what I mean.
But tracking expenses?
There is something cathartic and empowering in writing down (physically or digitally) where your money goes. It feels a bit like clearing out your closet and finally getting a sense of relief and well-being.
Once you create lots of order and harmony in your finances, you’ll be equipped with the knowledge you need to focus on your money goals.
I found it’s one of the most effective methods to figure out where your priorities are (yes to that extra avocado on toast) and, at the same time to understand where you are spending too much without knowing ($500 a year on my cell phone??).
How to track expenses (it will change your life!)
1. Tracking your expenses is the first step toward financial freedom
If you are familiar with the math behind financial independence and the retire early movement, you might know that to reach freedom from your 9 to 5 job, you need to save 25 times your annual expenses.
But how much do you really spend each year?
Tracking your spending is the first step to knowing how much you need to live the life you want. To still do the things you value the most while optimizing the things you don’t care about.
Read more about financial freedom here: 7 Easy Steps To Achieve Financial Freedom
2. It will show you exactly how much you spend and where your money goes
Tracking spending is a pure revelation.
There is something compelling about knowledge.
It’s easy to think there is no way for you to save more or cut out on any expenses in your life. But that’s because you don’t know what’s going on with your money. And knowing exactly where your money goes will help you feel in total control of your finances.
My friend Sam, for example, was spending $5,000 a year more than his girlfriend and didn’t have a clue as to why considering they pretty much had the same lifestyle.
It turned out he spent way more on clothes, his mobile phone bill, and eating out with friends without realizing it.
This knowledge helped him to get back on track and increase his saving rate without much effort.
3. Expense tracking will relieve the stress from your finances and empower your financial decisions
It’s easy to say money isn’t everything in life. When you don’t know where all your money goes and end up with very little at the end of every month, things can get stressful quite quickly.
Tracking your expenses will put you back in the driver’s seat and help you gain a sense of control over your finances.
Stop spending on stuff you don’t care about, and be more intentional about where your money goes.
I know it sounds obvious, but you will be surprised about how much a little discipline with expense tracking can make you more mindful of how you spend your money.
And once you’ve mastered your money, life can get really good pretty quickly.
For example, when I started tracking our expenses, I discovered that traveling and eating (in and out of the house) account for a whopping 40% of our annual expenses!
I was in shock! But for me, eating well and exploring the world are too important to skimp on. I much rather not own a car and walk or bike everywhere, buy fewer clothes, and find ways to reduce my bills.
By recording exactly where your money goes, you’ll see pretty quickly how you’re living your life and what you’re prioritizing.
And this will help you to make the right decisions to keep enjoying your life and find ways to optimize areas you don’t care so much about.
How to track expenses in 5 simple steps
Now that you know how vital tracking where your money goes is, let’s get started.
1. Download your account statements
One thing to know is that every month is different. One month you will need to pay your life insurance. The following month the boiler will break. There isn’t what you call a typical month for expenses.
In another month you will need to buy flights for your vacation…You get the idea.
This is why to get started, you will need to download at least three months of your latest bank statements. Most online banks will allow you to download .csv files that are easily importable in spreadsheets templates or budgeting apps.
Having at least three months will set you off on the right track to estimate exactly how much you spend on average in a year.
If you are up for a challenge, feel free to go deeper down the rabbit hole of your spending.
When I started tracking my expenses, I went as far back as a year, which was invaluable for setting my goals.
But three months is a good start.
Stop using cash
I know some people like to write down every expense by hand. And if that’s what works for you, great.
But I am a big fan of spreadsheets and comparing and reviewing what I spend every month against previous months.
And if you have an electronic record of everything (debit card transactions, credit cards, electronic transfers, PayPal, bank withdrawals), your life will be so much easier.
The great thing about having electronic records for everything is that you can download .csv files of all your transactions and add them to your own document or upload them into a budgeting app with one click.
2. Categorize your expenses
Group your expenses into categories. Don’t go too crazy here, but do create enough categories to help you narrow down the areas you can improve.
So splitting Eating Out and Groceries is fine, but don’t go as far as splitting Starbucks, Target, and Amazon unless you know you have a special problem with them. Just saying…
And to make your life easier and help you to get started, I want to share with you the categories I use when I track expenses:
- Bank & Credit Card Fees
- Property Taxes
- Doctor, Dentist, etc.
- Furniture & Home Improvements
- Grooming & Beauty
- Gym, Sports & Recreation
- Home Insurance
- Life Insurance
- Miscellaneous Expense
- Mobile Phone
- Rental Car & Taxi
- Restaurants, Coffee & Bars
- Travel & Vacation
- Vehicles Insurance
- Vehicle: Gas
- Vehicle: Repairs & Maintenance
3. Use a budgeting app or a spreadsheet
Decide what you are going to use to track your expenses.
I track my expenses once a month. I know some people suggest tracking them every day, but wow, that’s hardcore. And I really don’t think it adds much value.
Once a month is enough to give you a good idea of where your money goes without becoming a chore.
There are several ways that you can use to track expenses:
Pen and paper
This can be an option if you are old school and like to write things down. You can use a budget printable or just a paper journal. This method doesn’t allow you to quickly compare months and check your progress. But if that’s what you prefer, the important thing is to get started.
And to make your life easier, you can download my free expense tracker printable here.
I love a good old spreadsheet! I use spreadsheets for pretty much everything. It’s still my favorite method to track my net worth and my investments.
The advantage of using spreadsheets is that you can easily set them up to do precisely what you need. You can use simple formulas and pretty formatting to display the data, and you are in complete control of everything. The only disadvantage is that they can become a bit heavy once you accumulate years of transactions in one place.
If you like spreadsheets, you can download my free budgeting worksheet and use it as a tool to track your expenses:
Budgeting apps are my favorite ways to track expenses. As much as I love spreadsheets for many of my calculations, budgeting apps are much better at dealing with the hundreds of transactions I download from our bank accounts.
They are designed to categorize transactions and have helpful reports to show you exactly where your money goes and pretty ways to compare your spending.
I use WaveApps because it’s free and easy to use. You simply create an account and use the Personal section. Oh, and did I mention it’s free?
Other great alternatives are You Need A Budget (but you need to pay a fee), Mint (US peeps only), and Personal Capital (free and incredible if you also want to track all your investments in one place, the best for the US only).
4. Identify room for improvement
And now, the fun part!
Work out what your big-ticket items are and how you can reduce them. Things like housing, vehicles, food, and utilities are usually the top expenses in every household.
Do you really need your car? Could you rent a smaller place? Or sell your house and downsize?
Start with something simple, like negotiating your bills (using apps like Trim can help).
When I started tracking our expenses for the first time, I realized we were spending over $1,000 a year on utility bills! By making a couple of phone calls, I reduced our bills to only $600 a year. That’s a $400 savings in a couple of hours.
I also learned that we were paying for an online service to remind Dan when he needed to pay his motorbike’s road tax. He couldn’t even remember subscribing to that! And he was paying $5 a month for no reason. A quick phone call stopped that payment straight away.
I also reduced our mobile phone bills as I realized how much we were spending by upgrading our mobile phones every couple of years. We now buy our phones outright and keep them until they are no longer fit for purpose. We reduced our bills from over $40 to $10 a month. That’s $720 savings a year for both of us! Even if we bought a $500 phone each every three years (which we don’t), we would still be saving more than $350 a year on cell phones alone.
And these are just some examples to give you an idea of the power of tracking your expenses!
5. Track your progress and set goals
Like James Clear says in his book Atomic Habits:
All big things come from small beginnings.
It goes without saying that tracking your expenses needs to become a habit. And once the habit is set, you can track your progress and set attainable goals.
Are you ready to make a change?
A small change in your life, like spending a couple of hours a month to track your expenses, can compound into incredible results if you are willing to put in the work.
Once you know where your money goes, you can be more mindful of what really matters to you, be motivated to improve your life, and finally do what you love.
The important thing is getting started.