How To Track Your Expenses

by Millionaire Mommy Next Door on January 5, 2010

in Debt Reduction,How To Guide,Resources

Money flows like water. It can gush like a raging river or drip like an annoying leaky faucet at midnight. If we use this precious resource mindlessly, we face drought. However, if we first observe the ebbs and flows, effective management becomes a simple matter of design. In other words, you NEED to know where your money goes in order to manage the flow. Once you know where your money flows, you can design a realistic budget plan and start making conscious spending choices for your hard-earned dollars.

Create an expense tracking system and establish a routine. January is the perfect month to start. I’ve tracked my expenses for over 15 years. It really doesn’t require a lot of time (~5 to 15 minutes a week). I pay my bookkeeper to do this task for me now and at about $1.25 to $3.75 a week, it’s worth it. If you have kids, this can be an educational task to delegate to them.

Expense tracking options include:

  • save all receipts and file them into large envelopes labeled by expense category
  • write each expenditure under a category column in a ledger book
  • write each expenditure in a pocket-sized spiral-bound notebook (carry it with you when you leave home)
  • use a software spreadsheet like Microsoft Excel or Open Office Calc
  • use a personal finance software program such as Microsoft Money Plus Premium or Quicken.
  • sign up for an online application such as Mint.

While all of the above methods work, I use personal finance software (specifically Microsoft Money Plus Premium because I like their Lifetime Planner tool). Both Microsoft Money and Quicken include a wide range of helpful tools to make personal money management tasks easy. Specific to this particular task of tracking expenses, Microsoft Money Plus Premium and Quicken personal finance software:

  • connect to thousands of banks and update your expense transactions automatically
  • automatically categorize your transactions and compare them to your budget
  • show you exactly where your money is flowing using charts, graphs and reports
  • let you see the big picture or drill down to the details

Four Tips:

  1. Make the most of on-line banking. To make tracking your expenses easy and accurate, pay for everything with a check, debit, or credit card. Check your account often and set up as many automated transactions as possible. (Important Note: If you pay routine expenses by credit card, pay off your account balance in full each month!)
  2. If you must use cash, keep your receipts and enter each transaction into your expense tracking system.
  3. Make it a habit to track your expense transactions regularly. Designate a time weekly for this task and at the end of each month, total the amounts spent by category. In my case, it only takes about 10-20 minutes per week to confirm my automatically downloaded expense transactions and to reconcile my downloaded bank account statements.
  4. Here is a comprehensive list of expense category suggestions. Modify my list to fit your own needs and lifestyle:

    Auto -repairs, gas, insurance, registration, tolls…
    Auto Payments
    Bank Account Fees
    Beauty -hair cuts, manicures, makeup…
    Child Care
    Clothes
    Debt/Loan Payments -create a different account/category for each loan
    Dining Out
    Finance Fees
    Gifts
    Groceries
    Home Improvements/Maintenance/Repairs
    Household Furnishings
    Insurance (Disability)
    Insurance (Health)
    Insurance (Homeowner/Renter)
    Insurance (Life)
    Insurance (Medical)
    Insurance (Personal Liability)
    Liquor/Tobacco -if applicable
    Mass Transportation -bus, train, light rail…
    Medical -everything except health insurance premiums
    Misc -avoid this category as much as possible!
    Mortgage Payments/Rent
    Pets
    Recreation/Entertainment
    Savings (Education)
    Savings (Emergency Fund)
    Savings (Retirement)
    Savings (Specify Purpose)
    Storage Unit
    Subscriptions, Books, Software
    Taxes (Federal, State, Local)
    Tax Preparation Fees
    Toys (purchase, repair, insure) -includes boats, electronics, bikes, jewelry…
    Travel
    Utilities (Electric)
    Utilities (Gas)
    Utilities (Internet)
    Utilities (Misc)
    Utilities (Telephone)
    Utilities (Trash)
    Utilities (TV Programing)
    Utilities (Water)

Questions for readers: Where does most of your money go? If you currently track your expenditures, what method do you use?

{ 13 comments… read them below or add one }

fandd January 5, 2010 at 6:49 pm

Most of my money goes toward my mortgage and household utilities.

I recently found mint.com to track my expenses and I absolutely adore it. It’s good for seeing where your money went (perception does not always reconcile with what is really going on) and there’s an OK budget feature. Love the charts.

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Pete Michaud January 5, 2010 at 7:58 pm

To echo the above: for this type of tracking, mint.com is completely invaluable.

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Jon January 6, 2010 at 5:46 am

I successfully tracked every penny I spent last year & would recommend it to everyone. I don’t “budget” though. Budgeting implies restrictions & forces you to live within limits. I found that the simple act of tracking & consequently knowing how much cash I have available is enough to enable me to make the right choices.

2 tips:

1: Count money put into savings as spent money (this is alluded to in the list of categories but not explicitly mentioned).

2: Don’t get confused by charts. A lot of tracking software produce lots of gorgeous 3D charts & graphs. I hope no one uses pie charts to make decisions: http://blog.revolution-computing.com/2009/08/how-pie-charts-fail.html

3: Don’t spend hours staring at your screen & stressing over the figures. It doesn’t help.

I wrote my own software for tracking my spending in PHP & it’s hosted online so I can access it from anywhere. I spend probably 10 minutes a week inputting transactions as a date an amount & a load of tags like Flickr, a lot of my spending is automated & my system adds these transactions automatically so I don’t need to bother. You can then view lists of transactions by month or by tag, you can easily sum various transactions just by clicking on them & it is really easy to see what is going where.

It’s on a free server with limited bandwidth so I don’t share it with the whole world, but if you have access to a php server + MySQL all the files needed are available on request.

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Jon January 6, 2010 at 5:48 am

ahem… 3 tips (this is why I need software to track things for me).

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Debbie January 6, 2010 at 6:13 am

I love using Mvelopes.com It is not free but I am able to easily and quickly divided up my paycheck into our budget. The money sits in different envelopes waiting for bills. It automatically downloads all transactions from whatever checking and savings account I want. Then I move the downloaded info to whatever envelope is appropriate. I always know exactly how much money I have for ever budget item I have. It’s great to know how much money we’ve got put away for household stuff or groceries when headed to the store. Plus it keeps a record of each envelopes expensives for whatever time period I might need to check.

Well worth the fee.

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Little House January 6, 2010 at 1:33 pm

I’ve been tracking my expenses for years now in Quickbooks. The majority of my expenses go towards rent and utilities. Literally 1/4 of my income goes to rent, about 1/8 of my income goes to utilities. I love QB’s graphs and pie charts, it’s been easy for me to figure out where I can save money. My next step is categorizing my savings, I’ve never done this before. Your list is helpful, I might need to enter these savings categories!

P.S. I’ll have to check out Jon’s link on why pie charts fail, because I love them! They’re so colorful.

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me in millions January 6, 2010 at 3:36 pm

I have an excel spreadsheet that I created myself. It’s awesome and works really well for me. It has all of the categories that make sense for me and calculates my average monthly spending and yearly totals. Love it!

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Jennifer January 7, 2010 at 12:00 pm

I find that my cash is hardest to track. Dividing up the receipts after shopping can be such a pain. But I am trying again this year. We will see how long it lasts.

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Pamella January 7, 2010 at 12:02 pm

I appreciate the organization of expenses described above and have been using this system and refining it for my needs for years. My largest categories of expense are food (no mortgage to pay) and a couple of teenagers and education. I would suggest this additional category of education/personal development as I am always taking classes for some reason or another. Quicken online is my current choice of tracking and I love that it saves me time and energy as is transfers the data to TurboTax.

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Jenn February 13, 2010 at 9:19 pm

I use an Excel spreadsheet also. Nothing fancy, just a row for every transaction (expense or payday) with a running balance beside. I plan out the entire year in advance so on January 1st I can see that if I stick to the plan I’ll have $x at December 31st. It’s actualy very easy to predict a year’s expenses since most of the money spent is not a surprise. I enter the same amount every week for groceries, gas, and a tiny bit of cash for miscelaneous. Then I add in extra rows in the first week of every month for property taxes, electricity, internet and insurance. Our phone and cell bill is always due the third week of the month so I add a row in that week for each month. Life insurance comes out automatically on the 17th or next business day, so I all a row for that in the correct week of each month. My DH and I are paid every two weeks on alternating weeks. I add a row in every week and alternate between labelling that row as Payday – his and Payday – hers and plug in the appropriate amounts. The mortgage is autopaid every other Monday, so I add a row in every week for that amount. Once all the regular weekly and monthly expenses are listed I check the prior year’s history and a little list I keep of annual expenses that I need to include only once in a specific week or month of the year (eg. annual vet bill, saftey deposit box fee, licence tags, school photos/yearbooks etc. Now I have a good picture of what we will likely spend and earn for the entire year and can easily see if we will run into any problems in the future. If I want to make an extra mortage or retirement savings contribution I can just put in an amount and look down the rows into the future to see the impact. We have cut our regular expenses to the minimum and our normal, predictable expenses above take 55% of our take home pay. Everything above that is diverted to extra mortgage payments and retirement savings most of the time. In fact every Friday I update the predicted amounts with the actual numbers (from our bank account and online VISA account). Then I assess the maximum I can safely skim off and send to the mortgage/retirement accouts. Occasionally we reduce or skip those transfers and let the excess pool up to pay for a trip, vehicle replacement or other unusual expense (major appliance, car repair). Because we are fortunate enough to have an excess coming in every week we don’t budget weekly or monthly for things which happen very infrequently. If we need to put new tires on the car, repair the diswasher, outfit the kids with school clothes etc we just reduce or cancel the weekly transfer of the excess for a week (or many weeks for big items). When my DH’s SUV decided to retire itself (at age12) he drove my car for a few months and I worked from home. By the time he’d found a new(er) replacement he was happy with 5 months had passed and enough cash had piled up to buy it outright. When our dishwasher unexpectedly failed we washed dishes by hand for 3 weeks while shopping around for a replacement. We paid cash for the replacement. We’ve considered having an emergency fund set aside for these type of expenses, but this system seems to be working for us. Yes we both make decent salaries, but we used to spend to the limit of our means (and then some at times). Now we’ve pared down to what is really necessary and that leaves a lot of excess we can use to pay off the mortgage and pad the retirement funds. We’ve decided retiring early while still taking some great holidays in the meantime is more important than cable/satelite, restaurant meals, new vehicles, extensive trendy wardrobes or monster TVs. Yes their all great, but just not our priorities. Doing what is important to you rather than keeping up with the Jones’s sure makes it easy to see where to spend your dollars. In my weird little world, I happily buy used cars, second hand clothing, marked down groceries and then run off to Europe for a month with the kids every other summer and count down to our early retirement in December 2020.

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Mule Skinner February 15, 2010 at 3:48 pm

Automobile expenses: primarily insurance, fuel and maintenance since there is no debt on them.

Kid costs: piano lessons (huge!), school activity fees, school lunches, figure skating lessons.

Food.

Taxes.

Utilities.

(No mortgage, no loan interest)

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Cynthia January 11, 2011 at 10:59 am

Microsoft Money is no longer available. What do you propose in place of it?
Cynthia

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Alex August 27, 2011 at 4:33 am

I have tried budgeting with envelopes and excel sheets. I would stick the receipts on a spike with the intention of sorting through them once a month. Though sometimes it would be once every two months, and some of the receipts were unreadable…

I now use an app on my smartphone. It makes it as simple as remembering to punch in the cost and category after purchase.

Thanks for all the great advice on your blog.

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