21 Days to a Better Budget, Day 2: Track Your Spending

Welcome to Day 2 of 21 Days to a Better Budget. On Day 1, I asked you to consider your greatest obstacle to being “all in”. And I promised you that we’d hit the ground running with the nuts and bolts of budgeting.

So without further adieu, let me just say those three words that many of you have been dreading: Track Your Expenses.

The biggest failure point when it comes to budgeting is making an unrealistic budget. Here’s an example of what I mean:

Let’s say you decide you “should” be spending $750 a month on groceries. Sounds reasonable. But what if you’re currently spending $1,500 a month? If you allocate $750, I can all but guarantee you that you will blow through your budget that first month. Can you get your spending down to $750 over time? Absolutely! But not in one month. It doesn’t do you any good to pick an unrealistic number out of thin air. It sabotages your efforts and sets you up for failure.

The only kind of budget that works is a realistic one. And the only way to make a realistic budget is by tracking your spending.

I’m a big believer in “different strokes for different folks”. But on this issue, I’m telling you right now: It’s non-negotiable. Even if you do every other step I teach you in this series, you will not succeed if you don’t do this first.

Hopefully I’ve convinced you that tracking your spending is critical. Or at least convinced you to give a shot because why not? You’ve come this far already!

Fixed vs. Variable Expenses

Generally speaking, families have two different types of expenses: Fixed and variable. You probably already have a decent handle on your “fixed” expenses – like your mortgage or rent payment, health insurance premium, car loan or lease (if you have one), cell phone bill, and Internet and/or cable bill, to name a few.

These monthly expenses typically don’t change from one month to the next, so it shouldn’t take you long at all to calculate how much you’re spending on them.

But what about your variable expenses? All those trips to the grocery store, Target or Costco; all those online purchases; all those extra-curricular activities and school fundraisers. How much do these variable expenses cost your family each month?

This amount is much more complicated to track than your fixed expenses — especially in today’s day and age. Fifty years ago, people used cash, which they withdrew from their bank account – and often placed into designated envelopes.

Today, we’ve ditched those envelopes in favor of credit cards, Paypal accounts, online bank transfers, debit cards, checks and – occasionally, but rarely – still cash.

If you’re married, your spouse likely has all of these methods of payment, too. Figuring out what was spent, when, on which card is no simple task.

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5 Ways to Track Your Expenses

Unless you are still using cash envelopes for all of your variable spending, you are going to need a plan for tracking your expense. Here are five different methods you can choose from.

#1. Go old school. Grab a notebook and pen to write down everything you buy. Even if it’s “just” a $.60 candy bar or a $4 latte. If you’re married, your spouse must write down everything, too. We used this method when we first started budgeting. Once every few days, I “downloaded” the written data into a spreadsheet I had on my computer. Over time, I started categorizing our entries. The candy bar went into “Groceries & Food” while the latte got sorted under the “Blow Money” category. (We’ll talk more about categories in a future email, so don’t worry if you have no idea what yours are.) This is the most tedious of all the methods – but it’s also the easiest and cheapest to implement.

#2. Use a virtual pen and paper. Today most of us have cell phones or tablets, which go with us everywhere. Those mobile devices have all sorts of apps that work just as well – if not better – than a pad of paper. Use your notes application on your cell phone, or try downloading Evernote (I talked about Evernote and Evernote Premium in this recent post on Having a Paperless Home & Home Office). You can sync it up with Evernote for desktop, and easily share your data with your spouse.

#3. Keep your receipts. Instead of writing down each and every expense on the spot, you can collect your receipts to enter them into some kind of a ledger — probably in Excel — at the end of each day or week. (I recommend daily tallying, so you’re less likely to lose receipts or forget what you bought that particular day.) Be mindful of purchases that don’t necessarily provide a receipt, like when you give your child $10 to spend at the school book fair.

If these first three options sound too labor intensive for you, take heart. There are a couple of options that are more hands-off:

#4. Use Mint.com. Mint.com is run by Intuit, the same company that powers Quickbooks; unlike Quickbooks, however, Mint is free. You connect Mint to all of your financial accounts – checking, saving, credit card, etc. It then automatically imports all transactions: Swipe your card at Target for $40, and Mint knows about it. Your job is to then go into Mint and categorize that expense. Was it groceries or school supplies you picked up that day at Target? In order to use the money-tracking services, you will need to enter your financial account’s user names and passwords, which is why Mint has triple-layer, bank-level security. My husband and I used Mint for several years and it definitely helped us to automate our tracking – a huge improvement over doing it with pen and paper. You can read more about my experiences with Mint HERE.

#5. Use YNAB. About two years ago, I switched from Mint (which is free) to You Need a Budget, or YNAB (which has a one-time fee of $60 an annual fee of $50 – they literally *just* changed their billing structure). Unlike Mint, YNAB does not automatically import transactions; you can either enter them manually on the app as you’re making the purchase, or you can download a file from your bank/credit card and upload it to YNAB (this is also changing in the new YNAB – you will be able to automate this. I don’t have personal experience with it, but it sounds slick). The other reason I adore YNAB is because its budgeting functionality is far superior to Mint’s, and it integrates seamlessly with the tracking. More on that in a future email. You can read about my experiences with YNAB HERE. And go HERE to read about YNAB’s brand new web-based platform, which will have an annual fee vs. a lifetime one.

I just threw a lot of information at you and I know it can be difficult to decide which method to start with. The good news is that there is no right or wrong way – they all work, as long as you consistently do the work.

How Long Do You Need to Track Your Spending?

If you are already dreading the idea of tracking, I have some more bad news for you: You will need to track your spending for at least two months in order to make a realistic budget.

(Actually, I recommend that you track forever, but we’ll get there in a few more days, so don’t panic yet.)

If you want to work backwards and recreate all of your spending for the past two months, you can do that. The important thing is to get an accurate picture of your spending patterns – and for that, you will need at least two month’s worth of data.

You may be wondering why you can’t just track for a week and then multiply your totals by four to get a monthly budget? Or by 52 to get an annual one? I tried to do this when we first started this process – that’s how much I dreaded this task (although remember, we were doing it old school; now I actually enjoy tracking with YNAB!).

What I quickly learned is that a x4 or x52 number does not accurately represent your real spending totals. Some weeks you have a big Costco stock-up, other weeks you barely stop for milk. Some weeks you celebrate your child’s birthday or a major holiday. Other weeks, the whole family is on lock-down with the flu.

Life ebbs and flows. So do your expenses.

Even if you think you have a good handle on how much you’re spending — and on what, I guarantee you that you will be surprised by the information you learn from tracking.

Tomorrow we are going to talk about what to do with all this data you are collecting. In the meantime, I want to give you your homework for tonight.

Sit down with your spouse (if you’re married) and discuss the importance of tracking. One of you may be less convinced than the other. In this case, a more “hands off” method – like Mint.com or YNAB – is definitely the way to go.

Decide which method of tracking you are going to use. Buy the notebook or sign up for the program. Do what you have to so thattomorrow morning you can start tracking.

Which method will you be using? I’d love to know. Got questions about tracking? I’m here to help!

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