Lately, I’ve been watching the TV show, Till Debt Do Us Part, and a common thread in every episode is that the participants have no clue on how much money they are spending and on what. While I’ve never been deeply in consumer debt, I started becoming smart about our finances only when I began to track our spending.
Tracking your spending helps you with two financial goals that almost everyone has:
- Saving Money: When you start finding out where you are spending your money, it is easy to figure out how you can save money by cutting back or even eliminating spending in some areas. You can concentrate on saving even a little bit on your biggest expense categories, compared to cutting back a lot on smaller expenses.
- Retirement: As tracking expenses becomes a habit, you’ll have a good picture of how much money you need to maintain your lifestyle. Your annual expense run rate is key to guesstimating your number: the amount of money you would need to retire.
It does sound tedious that you have to keep your receipts around and write down everything or input data into your home computer but software such as Microsoft Money or Quicken make the job a lot easier. Personally, I use Microsoft Money and I don’t bother entering every receipt or tracking every little penny we spend. Since we almost always use a credit or debit card, when a statement arrives in the mail, I take a few minutes to balance the account and it is easy to figure out spending categories for most expenses (an entry for Shell is almost certainly Automobile:Gasoline). You’ll have to split expenses manually into categories only for a few places like Costco or Wal-Mart. Once it becomes a regular habit it only takes a few minutes every day and is well worth the trouble.