If you want to achieve any financial goals, you need to know how much money you make, and how much money you spend. So, one of the most important personal financial habits you can develop, is tracking your money.

But if you’re just stepping into the world of personal finance, you might be wondering, what does it mean to track your money?

Tracking your money is the process of monitoring and keeping a record of your income and expenses. It enables you to identify bad spending habits, and make adjustments to improve your finances.

Many people track their money using a spreadsheet or budgeting app, while others prefer to use a hand-written expense tracker.

Though, regardless of which method you choose, the process is the same. So, if you feel like your financial life could benefit from tracking your money, here’s a step-by-step guide to get you started.

 

 

Why tracking your expenses is important

1. Start with your income

Tracking your expenses doesn’t make a whole lot of sense, unless you know how much money you have to work with. So, to start the money tracking process, you need to calculate your monthly income.

If you get paid on a salary, this will be easy. Just add up the amount of money you get paid each month, and set that number as your starting line. If you work hourly, are self employed, or on commission, this might be a little difficult. But since you still need to start somewhere, we recommend starting with 90% of your average your income over the last 3 months.

In other words, if your (take-home) income over the last three months is $/£5,000, then your starting point should be $/£4,500.

Now that you have your income nailed down, it’s time for step 2.

 

 2. Create a zero-based budget

Creating a zero-based budget is crucial when tracking your money. It eliminates any financial grey area, and makes tracking your expenses a breeze. But of all the steps, this is the one that requires the most work.

Though, once again, we should probably address an obvious question, what is a zero-based budget?

A zero-based budget is an expense tracking method wherein you give every dollar/pound of your income a specific purpose. Rather than assigning percentages of your income to broad budgeting groups, you allocate exact dollar/pound amounts to specific budgeting categories, and subtract them from your income until you’re left with zero.

(Hence the name, Zero-based budgeting)

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For instance, if you make $/£2,000 per month, you will subtract the amount you plan to give, the amount you plan to save, the amount you plan to spend on food, clothing, gas/petrol and any other expenses you plan to have throughout the month, until you don’t have any income left to budget.

This exact process will make tracking your money a worth-while cause, because it only takes a few seconds to know where you stand with your spending. Are you spending too much? Did you budget more than necessary for a specific category in your budget?

Questions like these are simple to answer with a zero-based budget.

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3. Log your expenses (daily)

Now that you have your zero-based budget, you need to get in the habit of logging your expenses on a daily basis. And when you log your expenses, you should subtract the amount you spent from the proper budget category.

If you set up your budget properly, this will be incredibly easy. And the more often you do this, the easier it gets.

In fact, I would go as far to say that logging your expenses as soon as possible after you spend money is a great idea. The more intentional you are about logging your expenses, the easier it will be to stay on track with your budget. And isn’t that the whole point?

So, if you use a spreadsheet, log your expenditures every time you come home. If you use an app, pull it up the moment you spend money, and log that expense. If you prefer to track your money by hand, keep your expense tracker on your person, and write them down at the time of purchase.

At the very least, you should log your expenses once a day.

I can tell you from experience that nothing bogs down the process of tracking your money like a back-log of expenses. Make this a habit.

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4. Keep track of any additional income

Whenever you make a little extra money, you should add it to your budget. Then, once you’ve accounted for that income, divide it into any budgeting categories you see fit.

It doesn’t matter if you put all of it into savings, add it to your fun money category of your budget, or give it all away. You need to include it in your budget.

The purpose of tracking your money is to know exactly how much you make, and exactly how much you spend. So, don’t forget to track your extra income.

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5. Find areas of improvement

If you’re going to track your money, you should do it with the purpose of improving your financial situation. Otherwise, what’s the point?

It doesn’t really do you much good to keep track of your income and expenses unless you use the habit to improve your finances.

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So, periodically, you should go through your expenses, and look for areas of improvement. For instance, you might discover that you didn’t budget enough for a particular category. Or perhaps you are spending too much on food. You might even realise how much debt you pay each month, and that getting out of it would be majorly beneficial to your financial health.

Track your money with purpose, and continually look for ways to improve your financial habits.

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Our recommended money tracking apps

There’s no doubt that apps can make your life a lot easier. And if you’re the kind of person that doesn’t want to log expenses into a spreadsheet, or a hand-written expense tracker, a budgeting app might be perfect for you. But are there any good budgeting apps out there? Yes, and we only recommend one.

EveryDollar is our #1 recommended budgeting tool. It makes zero-based budgeting and tracking your expenses incredibly simple. It was created by Ramsey Solutions, which is just an added bonus. (Dave Ramsey is my boy — even though I’ve never actually met him)

YNTB is another good app for the US.

The EveryDollar app makes budgeting easy when you’re out and about, and I will say that it makes marital budgeting about as simple as can be. My wife and I use it every day, and other than the occasional lack of WiFi, this app goes with us everywhere.

For the UK Yolt is great app, another good one is Emma.

 

How to make tracking your money easier

I’ve made plenty of mistakes when it comes to tracking my money. So, if you’re getting ready to start tracking yours, I have a few little gems of advice for you.

These tips would have saved me a bunch of struggles had I learned them earlier, and that’s exactly what I hope they’ll do for you.

 

Only use your debit card

This is, by far, my favourite budgeting tip. And though it might seem a little radical to most people, it changed my financial life forever!

For a long time, I spent money using whichever credit card gave me the most cash back at the time. I would pay them off right away, but it made my finances pretty messy. And messy finances do not make for easy tracking.

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After my partner and I read The Total Money Makeover, we decided to stop using credit cards, and pay for everything with our debit cards. We combined our bank accounts, so this would make it really easy to keep track of our finances. And man did it!

Now, when either one of us want to track expenses in our budget, all we have to do is log into our bank account. This makes it super easy, and carries the added bonus of never going into debt.

I told you, it sounds radical, but it is the most influential financial decision I (and we) have ever made. We now have minimal debt. No mess. Just clean and simple finances.

 

Get out of debt

I would like to amend my statement about credit cards making your expenses messy and instead say that all debt makes your expenses messy.

I mean think about it, if the easiest possible financial situation was one where you make money and keep all of it, then any payments you add into your financial life create complexity.

And when you’re tracking your money, simplicity is the name of the game. So, get out of debt. It will make tracking your money a much easier process. Oh, and you won’t owe anybody money, which is pretty much the best.

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Use remaining money to get ahead

The better you get at tracking your money, the less of it will slip through the cracks. So, when you have a little leftover money at the end of each budgeting cycle, do yourself a favour and use it to get ahead.

What do I mean? Well, you could use the extra money to pay off debt, build an emergency fund, add to your retirement, start saving for a car, or anything else that will improve your financial future.

 

 

Why tracking your expenses is important – Final thought

Do you track your money? Do you have any other tips you would like to see in this post? Be sure to leave a comment. We would love to hear your story as well as any other helpful tips for tracking your money.

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