You’ve spent all your monthly income but you have nothing to show for it and you don’t understand where your money is going. Does this sound familiar to you?
I learnt a lot from tracking my expenses for a year, I think tracking expenses is vital for anyone that wants to manage their finances better and increase financial awareness. Tracking expenses is useful for a variety of circumstances, whether your goal is to:
- Stop living paycheck to paycheck
- Get out of debt
- Save more of your monthly income, or
- Understand where your money is going
My Personal Experiences
When I first starting tracking my expenses a few years ago I was living with my parents and I was saving money, but no where near how much I should of been saving considering my parents are amazing and have never asked me to pay board. So one day I decided to go through my bank statement, and found a lot of transactions that looked like this:
- Debenhams £25
- Miss Selfridge £30
- Bella Italia £15.95
- Primark £7.50
- House of Fraser £60
- Virgin Trains £4.20
- New Look £15
Now looking at each of these individually, £25 in Debenhams isn’t too bad, I would consider £7.50 in Primark frugal, £15 in New Look is nothing, a meal out for £15.95 is average. I used to think ‘I don’t spend that much money and I am also saving, so I can treat myself to a £60 purse from House of Fraser’. But when you add it all up it comes to £157.65 and this was maybe over a two week period, so over a month I was spending about £300 on makeup, clothes, eating out etc. I had so many clothes and makeup that I rarely used.
You make think that you rarely buy new clothes or makeup, but your weakness may be something else, such a a daily Caffe Latte from Starbucks before work for £3.45. Over a week this adds up to £17.25 and over a month £69 just for coffee. David Bach, author of The Automatic Millionaire, calls this the latte factor. Don’t like coffee? Maybe your latte factor is your daily lunch for £5, which is £25 each week and £100 each month. You can easily save a third of this if you take a packed lunch. By tracking your expenses you can find out what your late factor, your weakness, is.
What did I learn?
- I was very wasteful with my money
- What I was spending my money on wasn’t making me happier or adding value to my life.
- I was burying my head in the sand and using retail therapy because I wasn’t happy with other aspects of my life
The most important thing I learnt was that I was wasting a lot of money on material possessions. I used to be more fashion conscious and make purchases based on what was fashionable. I would buy a £30 jumper and convince myself it was worth it because I was buying ‘quality’. But after wearing it for a couple of weeks it would end up in the bottom of my draw because it didn’t fit me right. Now I only buy new clothing when I need it and only if it fits perfectly, my rule is that I have to give something to charity if I am buying something new. I have not bought a new item of clothing in the last three months.
Experiences are more important than material possessions
The satisfaction and thrill of purchasing material possessions fades quickly and you are back to how you were feeling originally. However when you spend time on experiences, the happiness and the memories from these experiences stay with you. I now choose to spend more time on experiences and I am much happier and satisfied with my life. Rather than going on a shopping trip with friends, I would rather meet up for a coffee or have a girl’s night in, I still get to socialise and spend less money doing it.
Why should you track your expenses?
To learn where your money is actually going. Once you know where your money is going, you can see if what you’re spending your money on matched your priorities.
Once you know how much you are spending you can determine where you want to cut back so you can spend money on your priorities. For example, the money you save with a packed lunch can be used to make overpayments on your credit card.
It is easier to come up with a budget when you know how much your essential outgoings cost (such as rent, utility bills, council tax) and how much your discretionary spending is.
How to track your expenses
I choose to use an app called Money Lover
, I always have my phone on me so it is really easy to enter this into my app as soon as I make a purchase. At the end of each month I then go through my bank statements to enter the direct debits and standing orders into my app. Money Lover has different categories for income and expenses, you can also view your expenses in a graph or chart format making it easy to see where you are spending the most. There are so many apps out there for this purpose, alternatively you could you a pen and notebook or Excel.
How long should you track your expenses for?
I would suggest three months as a minimum so you can take an average. I know some months I get a large unexpected expense such as fixing my car and some months where I just don’t go out much. A year would be ideal, this is so that you can take into account annual expenses such as insurance and you may spend more money in certain seasons. For example, I spend more in the summer due to going on holiday and weekend breaks. You may spend more in the winter due to Christmas and the New Year. There is no reason to track your expenses for a year and not carry on, if you’re learning from it I’d suggest keep going.