“You can't manage what you can't measure” -Peter Drucker
Imagine you’re driving down the highway. You think you’re going at a reasonable speed, but your speedometer is broken, so you’re not really sure. Suddenly, you see red and blue sirens behind you. A policeman pulls you over and asks “do you know how fast your were going?” Since you had no speedometer, you had no idea that you were driving way over the speed limit. And now you’re getting a ticket. The reason? You weren’t measuring your speed.
When it comes to money, a vast majority of us are like the driver without a speedometer. We don’t really know how much we’re spending or saving, so we don’t know if we’re on the right track. Instead of a policeman pulling us over, we accumulate debt, or neglect saving. That all changes today!
Today, you will start to track your spending. That means recording every single purchase you make. Sound daunting? Like many areas of personal finance, it’s easier than you think. Let’s start by selecting your tracking tool:
Option 1 - Pen and Paper: The “old school” option is still a great one. Best if you prefer writing things down to using a computer. You’ll record your spending in a notebook at the end of each day. This option will require manually adding up expenses at the end of each week.
Option 2 - Spreadsheet: The most common method of expense tracking. Best if you regularly use a computer and are comfortable with spreadsheets. With spreadsheets, you can automatically sum up expenses by category at the end of each week.
Option 3 - Smartphone app: The “cutting edge” method. Best if you use primarily use a smartphone day-to-day. As you’re starting, use an app which requires you to manually log your spending (like the free version of Every Dollar) rather than an automated app like Mint. This way you’ll be manually aware each time you spend. Smartphone apps will automatically sum up your savings by category as you log them.
Next it’s time to choose our “spending categories.” It’s essential to break spending down into categories, so when you add up and review your spending at the end of the week, you know how much you’ve spent in each category.
Start with the below categories. Feel free to add or remove categories to make the list more relevant to you. We’ve also provided a few examples of expenses from each category.
Savings - Amount discussed in “Regular Savings” step!
Debt payments - Credit card, auto loan, student loan
Housing - Rent, mortgage, property taxes, home insurance, repairs
Utilities - Gas, electricity, water, sewage, internet
Transportation - Auto lease, auto insurance, gas, repairs, bus, taxi
Health - Doctor visits, medication, health insurance, gym membership
Food - Restaurants, fast food, groceries
Shopping - Clothes, household items, gifts
Entertainment - Cable bill, movies, Netflix, Spotify
Travel - Flights, hotels, rental car
Once you’ve picked your method of expense tracking and spending categories, let’s get started!
Begin by logging everything you spent money on yesterday and today. Include date, what you bought, expense category, and amount spent. If you don’t remember exact costs, do your best to estimate.
Like all challenges in the Path, actually do it now! Find a notebook, open a spreadsheet, or download the Every Dollar app. Then start logging!
Once you’ve finished logging yesterday and today, it’s time to form a new habit. Starting now, log your expenses at the end of each day. This is the equivalent of adding a speedometer to your car. Now you’ll know how well you’re doing when you review spending at the end of the week.
In the next step, we’ll walk through how to use your tracking to create a spending plan and regularly measure yourself against it! This is where many people falter in personal finance, but if you stick to the Path, you’ll find it’s a valuable and fun exercise!