Tracking expenses gives a person a better idea of where they are spending money and how much money is being spent over a given period. In most situations, this enables better decision-making. When you know how much you are spending, you can create a more realistic budget. It helps to clarify how much you spend on things like eating out, utilities, and other purchases. That could help you make better financial decisions in the future.

Expense Documentation

How do you know how much you are spending? The only way to see your spending is to write it down. Today, many people have various ways to spend money, including cash purchases, debit cards, and credit cards. That’s why it is essential to have a simple and streamlined way of recording your expenses across all spending methods.

Take some time to determine how you spend money. This could include any one-time or recurring purchases, whether debited from your account or made using a credit card. Make sure to document which specific cards you use, too.

Ways to Track Expenses

Once you know how you are spending money, the next step is to track those expenses on an ongoing basis. Usually, this is done every month, but you can do it weekly if that helps you to start forming some good habits. Choose a method for tracking expenses that works for your needs.

Pencil & Paper

The simplest of all methods, paper, and pencil, works well for many people. It may seem old school, but for many people, it is the easiest option for keeping themselves accountable. Keep a small journal with you at all times. Write down what you spend throughout each day. Commit to this process, writing down every one of your expenses.

Spreadsheets

A spreadsheet can be helpful for those who want a digital way of tracking expenses using their laptop, desktop, or tablet. Spreadsheets allow you to plug in all of your expenses. Then, you can collect all your receipts for the day or week and enter that information into the spreadsheet. It’s a simple tool for helping you to see where you are on monthly spending. You can quickly check the spreadsheet against your bank statement to ensure everything is in line.

Envelope System

Some people are very much paper-driven. That is, they make better decisions when they have cash in hand. The envelope system may work for you. In this system, you create envelopes for every category of expense you have. Then, you allot money to each of those envelopes based on your monthly budget. You divvy those funds into the envelopes by category as you get paid.

Then, you only use the money within that designated envelope when making a purchase or paying a bill. This way, you know to stop spending in that area when that envelope is empty. This method can help you stay very close to your budget.

Tracking Apps

Some people love digital tools, and tracking apps are an easy way to manage money on the go. Download one of the many apps available on your smartphone. With each purchase, update the app with the amount you’ve spent. Some apps allow you to get an ongoing balance of how much you’re spending in each category.

Because it is digital, it can also link to your bank account and credit cards to automatically update your spending. This way, you don’t have to actually do the work of inputting these figures.

Categorizing Your Expenses

Having an idea of what you are spending is a solid start, but you must continue using this data meaningfully. First, divide up your spending based on one of several categories.

Fixed Expenses

Your fixed expenses are those that remain the same every month. That may include your rent, mortgage payment, car, and home insurance, loan payments, or others that are always the same. Create categories for each of these areas. Typically, these are the budget areas you cannot change over the short term.

Variable Expenses

Variable expenses are also essential and must-pay costs, but they may be different and controllable each month. That could include, for example, your gas and electric bills, and you may have a credit card payment that adjusts each month based on how much you’ve spent. This could also include things like grocery bills and gas for the car. You can also include a savings account where you deposit a certain amount each month to build up your emergency fund.

Discretionary Expenses

Discretionary expenses are those that are not necessary purchases but those that you make anyway. This could include costs for eating out, money spent on clothing or household items, and extra funds you’ll put towards credit card debt.

Reviewing Your Spending

Once you outline your expenses, you can review where you are spending money to create a budget from this information. For example, your budget for fixed expenses is always the same each month, and you know how much you’ll spend there.

Next, estimate the cost for variable expenses based on the last few months. Within your budget, allocate enough money to cover this bill based on that goal. Finally, provide yourself with discretionary funds to spend on other costs, such as allotting a specific amount for clothing purchases, meals out, gifts for loved ones, or even trips to the coffee shop or nail salon.

By doing this, you are creating a precise level of oversight on where you are spending the income you are making. If you run out of money in any area, you may need to readjust your budget to factor in that information.