The Secret to Tracking Your Spending and Saving More Money

Knowledge is Power. Simply knowing something can change your behavior. If you don't think that new information can change your behavior, consider this:

You’re on vacation with your family at Lake Titicaca.

It’s hot out.

So, you decide to jump in the lake.

But, before you do, you spot a sign. The sign reads:

Caution: Giant killer eels in the lake. They will eat you for breakfast and not think twice about it. Stay out of the water – if you want to live.

Before you had knowledge of the man-eating eels, you were set on enjoying a nice little swim. But, with the knowledge of what going into the lake actually means (i.e. being eaten by killer eels), your behavior changes.

Track Your Spending to Gain Knowledge

Simply knowing something changes your behavior.

That’s why tracking your spending is so important.

When you don’t track your spending, you don’t know.

For now, you don’t have to worry about how tracking your spending will change your spending.

Instead, commit to empowering yourself with the knowledge of where your money is going – to know how your money is being spent.

This knowledge of where your money goes is startling (terrifying?). If you start tracking your spending, you’ll be surprised. I promise that you’ll be shocked by:

  • How much money you’re spending each year, in total
  • How much money you’re spending in the various categories of your life (eating out, shopping etc.).

You Have No Idea How Much Money You’re Spending

If you’re not tracking your spending, you have no idea how much money you’re spending.

And if you think you know how much money you’re spending – and you’re not tracking your spending – then you are wrong. You’re simply wrong.

Everyone I’ve come across that doesn’t track their spending – but thinks they know what they are spending – is wrong.

They’re usually between 20% and 30% short.

So, if they think they’re spending $70,000 a year, then they are truly spending $100,000. (At least, that’s what I’ve seen. But, others have come across the same 20-30% figure too.)

If you still think you know what you’re spending – but aren’t tracking it – then I challenge you to challenge yourself! Put yourself to the test! Go ahead and track your spending and compare it to what you think you’re spending. I guarantee that you’ll be surprised.

Knowledge Changes Behavior

Just like knowing what’s in the lake changes your swimming habits, simply having the knowledge of where your money is going will impact how you spend money.

If you took two hours this Sunday categorizing your credit card expenses to learn that you have been spending $1,000 a month at restaurants, you’re probably going to think twice about splurging the next time you go out to dinner.

Maybe, you won’t go out to dinner at all.

Perhaps with your historical spending figure of $12,000 a year on dining out seared into your retina, you’ll decide to take up the lost art of home cooking. (Or, maybe you’ll choose a less expensive restaurant – or pick up a frozen dinner from Trader Joe’s.)

Either way, the fact that you’ll be conscious of just how much money you’re spending is going to change your behavior. It is undeniable. You simply can’t have all this information and not do anything about it, which is the reason why tracking your spending is a good idea.

Wealth Building Tools of America’s Millionaires

I recently had the pleasure of reading the iconic money book, The Millionaire Next Door.

In the book, two Ph.Ds research the habits of American’s millionaires. This pair of nerds explored how millionaires were able to save more money and build more wealth than their peers.

What did they find?

The answer to building wealth is obvious; earn money and invest it. However, not spending money is just as important. (Technically, it’s the same thing.)

One of the best tools for not spending money is tracking your spending. And there is scientific evidence to prove this point; when the authors of the Millionaire Next Door asked one millionaire in particular if he had a budget, that millionaire practically screamed:

“Yessssssssssss!”

Even rich people are budgeting enthusiasts. But, it’s not just rich people who can be successful if they track their spending; everyday Joe’s can too.

My Eyeballs Fell Out of My Head When I Tracked My Spending

I know from experience that tracking spending is impactful. This is because I endured the same steps I am suggesting preaching here.

Recently, I pulled up my bank accounts and credit card statements for the first quarter of 2018. I tallied all my expenses in what is my favorite piece of software — a snazzy program called Excel. (But for our clients, we suggest they use our client portal because it’s so much easier.) From there, I was able to look at the numbers.

What did I find?

I found out I was spending a lot of money on vacations.

Do I enjoy vacation?

Of course!

Will I continue to pay for it?

Most likely.

But, with the sizable price tag of this line item staring me in the face, I can’t help but think about it. And I can’t help but think that there is likely a way I can enjoy vacations while paying less going forward.

UPDATE: Our next vacation will be in Southeast Asia (Thailand, Vietnam & Cambodia). Airfare will be provided by points. Lodging will be a mix of points and cash – and the local fare will be a deal! I can’t wait for this awesome budget vacation!

A Young Professional Tracks his Spending

If millionaires, man-eating eels, and your humble author’s experience tracking spending aren’t enough to convince you of the value of tracking your spending, consider this:

Recently, we had the pleasure of working with a young professional – an engineer in industrial design who was making a decent living in his field.

But like many working Americans, he was spending every single penny he earned.

And, like most Americans, he wasn’t very happy about it; he wanted to save money.

And, at the start of our financial process, he committed to doing just that.

Of course, many people will state their commitment to saving money. Will he be able to do it?

Yes! He is already succeeding because he did the one thing that separated him from the pack. He tracked his spending.

Just as every single person does when they actually figure out where their money is going, he was surprised at how much he was spending and what he was spending on.

As with many folks, this gentleman’s biggest expense was eating out. He was spending over seven hundred dollars eating out every month – without even knowing it. (Or rather, he didn’t know it until he tracked his spending!)

Let that sink in for a second. I’m going to come back to the sentence because I think it’s important.

He was spending hundreds of dollars eating out every month. WITHOUT. EVEN. KNOWING. IT.

With this new knowledge of his spending, he was determined to reduce his restaurant bill and save towards his goal of home ownership.

Hopefully, by now you’re convinced of the value of tracking your spending. So, now let’s discuss how to do just that.

How to Track Your Spending

If you want to take your money game to the next level – and save more money – you’re going to have to put in a little bit more work. You do this by knowing where every single penny of your money goes.

When it comes to tracking your spending, there is more than one way to skin a cat:

  • You can be old school and do it with pen and paper.
  • You can use any number of online apps and tools like Mint. (For our clients, we use a tool like Mint.)
  • Or, if you’ve got all your spending coming from one place – such as a single credit card or a single checking account – then you can just pull up your monthly or annual statements to see your spending there.
  • And finally, for those obsessive control freaks who must be able to make each and every single category on their own, there’s the Excel spreadsheet or even Google sheets.

Tracking Your Spending is Not Budgeting

Most people hate budgeting. There is a good reason for this: budgeting sucks.

And that’s where I’ve got good news; tracking your spending is NOT budgeting. And, tracking your spending is BETTER than budgeting.

There are lots of problems with budgeting.

To start, budgeting commits you to a specific dollar for each and every category of your life. Budgeting says:

“I can only spend $100 this month on eating out.”

And that’s not any fun; no one likes to have restrictions or limits hanging over them.

Fortunately, tracking your spending is nothing like that.

When you track your spending, there are no limits; there is only knowledge; there is only the knowledge of how much you’re already spending. And you can do whatever you want with that knowledge. You can be at peace with your spending – or you can put a plan in place to make a change.

Another problem with budgeting is that budgets inflate your spending. A budget instructs you to spend “X” dollars per month on category “Y”.

For example, that may be $100 a month on eating out.  If you do that, your spending on eating out will always manage to bump up to that $100 figure. That is, if you tell yourself that you can spend up to $100, you will spend $100 – and rarely anything less.

In short, don’t create artificial ceilings for your spending. (That’s what budgeting does). Doing so will encourage you to get as close as possible to that artificial ceiling (to spend as much money) as possible.

Thirdly, budgets are problematic because budgets distract you from your goals. When you make and follow a budget, you lose focus of your goal. And in case you forget what your goal is, it’s this:

Save more money.

When you create a budget, you lose track of your goal. Instead of simply focusing on saving money, you become distracted by the various artificial spending ceilings you’ve created for each category.

Let’s once again return to our eating out example: if you end up spending $1,000 a month on eating out and you’ve only budgeted $100 a month, you’ll be focused on the $900 monthly difference.

If you’re tracking your spending, your eye will be on the prize as you observe that you’re spending $12,000 a year on eating out!

Tracking spending keeps you focused on saving money – the whole reason we’re doing this exercise in the first place!

Why Tracking Your Spending Works

Already discussed, if you’re not tracking your spending, you have no idea how much you’re spending – and the how much you’re spending in each category of your life. And if you think you know, you’re wrong.

Admitting that you have little idea of what’s actually going on with your money is the first step. From there, you get down to the uncomfortable task of tracking your spending.

Next, your eyeballs fall out of your head once you actually track your spending; you’re surprised to learn how much you spend, and what you spend it on.

The attainment of knowledge is the critical part.

Once you become aware of your spending habits, you’ll likely come to the conclusion that not all of your spending reflects your goals. 

When you track your spending, you realize that you are spending too much money on things that you don’t care that much about. (Maybe that’s eating out. Maybe that’s the cable bill. Maybe that’s the car payment. Or maybe it’s the convoluted life insurance product that a commissioned salesperson pushed on you.)

The biggest opportunity of tracking your spending lies in cutting out the stuff that you don’t know about, or forgot about it, or never really thought about spending money on. And that’s an easy win.

After all, who doesn’t want to stop spending their limited, and hard-earned money on stuff that’s not that important to them?

And with that knowledge of how you are spending your money today, you can take action to spend less money on the things that you don’t care about and – wait for it – redirect that money on the things that matter the most to you.

What matters will vary from person to person. Maybe it’s paying off student debt or just plain saving for college, launching a business, saving for a house, or retiring early.

Save More Money by Tracking Your Spending

No matter how you track your spending – be it online software, a spreadsheet, or old-fashioned pen and paper – this one act will unavoidably help you save more money.

Ultimately, tracking where your money goes will also allow you to spend money on those things that matter the most to you.

I invite you to review your spending regularly. Monthly reviews are a great place to start. Reviewing your spending monthly will allow you to see patterns in your spending – and empower you with the knowledge of knowing where your money is going.

Once you know your spending, you can decide if your spending lines up with your values and your goals. And if you want it badly enough, you can make a change.

You work hard for the money you earn (or you’ve earned), so why not make the most of it?

Tracking your spending may be a pain, but it will change your (financial) life forever.