Seriously. Is there any topic in personal finance more hackneyed, more mundane, more down-and-out boring than tracking your spending?
And yet, here I am. Because y’all gonna make me lose my mind. Most of you are great at identifying your financial goals, and some of you excel at quantifying these goals. But implementing a practical plan to fund these goals? Well…
Let’s start with first principles. Budgeting is (1) identifying and price-tagging your goals, and (2) implementing a plan to fund the goal. But there is a chasm the size of Hells Canyon between Steps 1 and 2. Tracking your spending bridges the gap. Here’s what I mean…
You are moseying along, funding your 401(k) appropriately, not carrying credit card debt, maintaining a steady amount of “just in case” cash savings. Basically, you’re winning the personal finance management game. But looking out over the horizon you see…a new car, a bucket-list trip, your child’s college education. You have what a government bureaucrat would call an “unfunded mandate.”
So, what are you going to do about it? If you are a “B” student, you will calculate what you need and pinky-swear to save $250 a month (or whatever) to the cause for X number of months. You may even set up an automatic transfer of the funds from your checking account to your savings account. (A “B+” student would set up a direct transfer from their paycheck.)
Here’s the problem. Likely you decided on that $250 figure based on the price tag of the goal and the date by which you would like it accomplished. But did you give anything more than a passing thought as to where that $250 is going to come from? Because if you did not, then there is a high chance that this plan with fail.
This is where, yes, tracking your spending comes in. Not forever! Just for a wee bit of time.
Step One: Line by line, review the last three months of spending. Every transaction. Every account. Categorize what you have spent (at whatever level of detail is useful to you) on a spreadsheet.
Step Two: In reviewing your usual monthly spend (now based on real numbers, not your faulty, rose-colored-glasses memory), what needs to change in your spending to accommodate this hypothetical $250?
If you routinely have that much leftover already — and you can see this because there is a steady gain in your savings account — then fine. Your work here is done, and you may leave class early.
But if you do not predictably and sustainably have that amount left over, what needs to change in your spending habits to accommodate this new goal?
Step Three: Let’s say that you decide that the source of funding for your new mandate will be the amount of money you spend eating out and ordering in. (I chose this as an example because it’s usually the first thing people mention.) Usually, you spend $500 a month on this; now you will cut that to $250. Well, make that $150 because you still have to eat; you need money to buy more groceries.
Step Four: Going forward, let’s say for just the next 30 days or so, track just this one category of spending…eating out/ordering in. Was it realistic to cut it down to $150 per month? That’s a big lifestyle change; were you overly ambitious?
Step Five: If necessary, reset the goal posts accordingly. Maybe an eating out/ordering in budget of $300 is more realistic. Do you change the timeline for the goal? Do you change the price tag of the goal? (A cheaper car or trip, for example.) Or do you go back to Step Two and identify another source of redirected spending?
How you track your spending is the least important part of the equation, but the one many tend to focus on first. Because who doesn’t love a budgeting app? Here’s my philosophy: breaking a sweat matters.
Back at Step One, you may have the ability to pull up your historical spending already nicely categorized in a colorful pie chart. That’s not good enough. Just this one time, I need you to “physically” look at each of your transactions and ask yourself, “Did I really need to have that protein shake delivered?” Building the pie chart by hand has a purpose; it also builds mindfulness.
For the same reason, at Step Four I much prefer that you use a “dumb” app for tracking (like this one) that does not link to your checking/credit card accounts. You manually enter each transaction. (Pen and paper is also awesome!) Again, the act of physically recording your spend matters for building awareness in the moment. It doesn’t have to be forever but do give it at least a month. After that, if you feel that your new plan is working — that you have internalized this new spending behavior — then you can ease up on the daily spending tracking.
There is just one step left…
Step Six: Track progress to your goal, not your spending. Check in monthly or quarterly on the hopefully growing balance. Are you on track? Or do you need to go back a few steps and reset?
Let’s end where we began — your unfunded mandate. Do not track your spending because it’s what “you’re supposed to do.” There is no virtue in the exercise. Do it because it can help you achieve a specific purpose that matters to you.
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