If you want to be financially successful and achieve your goals there’s one practice you can incorporate today that will virtually guarantee your success.
Tracking and recording your income and expenses is absolutely the best thing you can do to manage your money better. Unfortunately, due to the online access to our financial accounts this is considered by many to be an unnecessary practice today. Nothing could be further from the truth. I’ll share with you the 3 benefits you’ll gain by incorporating this practice.
Over the years I've coached many people to manage personal finances. I always start with an assessment of their current financial situation. I then assign them the task of tracking and recording their income and expenses for 30 days. My reason for this is to get to the truth: the actual dollars they’re making and spending. Unless this information is accurate, the budget I help them create will be inaccurate, lead to frustration, and cause them to quit.
With rare exception, most clients came back surprised or even shocked. They can’t believe how much more they’re spending in certain areas than they originally thought. Of course, there’s a reasonable explanation for this.
Studies have shown that our short-term memory can hold up to 7 pieces of information at the same time… But only for 20 seconds! That explains why you can’t remember what you ate for lunch last week on Tuesday. Give it a try. I’ll wait…
It also explains why we’re not able to manage our money by simply trying to remember what we spent. Managing money by doing mental math is doomed to fail.
In a typical household budget, there are between 80 to 150 financial transactions each month. Many of these expenses are not routine like bills or monthly payments. They’re expenses such as, eating out, buying groceries, gasoline, tickets to the movies, or getting a haircut. In some areas, we spend multiple times per month, making it even more difficult to remember how much we spend.
I remember when my wife and I first started tracking our spending. After the first 30 days, we realized we were buying food from the grocery store about every other day. We were making 15 to 20 trips per month to the grocery store. That revelation would never have happened if we didn’t track our spending. With better planning, we were able to reduce the number of trips and also save the wear and tear on our cars.
Tracking your spending has many benefits. Here are three main reasons why you should do it:
1. Awareness - “Know before you go”
You should always know what you can spend before you go to spend. Even if you don’t have a written budget you have at least an idea of how much you can spend in each area of your life. How do you know when you’ve spend enough or all that you have? Finding out you’ve overspent at the end of the month is not only frustrating, it's useless. You need this information daily so you can make the right spending decisions. Recording your spending frequently will make you aware of what you’ve spent and what you have left over. Always “know before you go.”
2. Control impulse buying
Finding things to spend money on is easy! Just browse Amazon and you’ll never run out of things to buy. As a young adult, most of my spending was impulsive. It’s easy to overspend when there’s no evidence to show you that what you’re doing is hurting you. Tracking and recording show you the truth about your spending. Not tracking is a license to overspend. When you track and record your spending, especially when done through a written budget, impulse buying becomes a thing of the past.
3. Reaching your financial goals
Whether your financial goal is to pay off debt, increase your emergency fund, or save for a house, tracking your spending will empower you to reach it. By applying this one practice consistently you’ll have the knowledge to make wise spending decisions to ensure you reach your goals.
Call to Action
- Download and print the Tracking by Category form
- Each day record everything you make and spend
- Do it for 30 days to capture all income and expenses for one month
A great tip to make tracking your spending a habit is to always ask for a receipt when you make a purchase. Keep receipts in your wallet, purse, or pocket throughout the day and record them at the end of each day. When done daily, this will take less than 5 minutes per day.
In my next post, I'll show you how to create your own budget using the information gained from tracking your spending.