Understanding your monthly income and expenses is essential if you want to attain any financial objectives. Because of this, keeping track of your money is one of the most crucial personal financial habits you can form. But what does it mean to track your money if you are just getting started in the area of personal finance?
Many people track their money using a spreadsheet or budgeting app, while others prefer to use a handwritten expense log. Regardless of which method you choose, the process is the same.
If you feel that tracking your money could benefit your financial life, here’s a step-by-step guide to getting you started.
Start with your income
Tracking your expenses doesn’t make much sense if you don’t know what kind of money you need to work with. To start the process of tracking money, you need to calculate your monthly income.
If you receive real pay stubs, this will be easy. Just add up the amount of money you receive each month and set that number as your starting line. If you work by the hour, are self-employed, or work on commission, it can be a little tricky. But, since you still need something to start with, we recommend starting with 90% of your average income for the past 3 months.
In other words, if your income over the past three months is $20,000, then your starting point should be $15,000.
Now that you have determined your income, it’s time to move on to step 2.
Create a zero-based budget
A zero-based budget is essential for keeping track of your finances. It removes all financial ambiguity and makes it simpler to keep track of your spending. However, of all the processes, this one requires the greatest effort.
With a zero-base budget, you may track your spending by setting a particular objective for every penny of your revenue. You designate precise amounts to individual budget categories and deduct those amounts from your income until it equals zero, as opposed to giving a proportion of your income to large budget groupings. Therefore, it is also possible to rename this step as “budgeting from scratch”.
For example, if you make $5000 a month, you subtract the amount you plan to give away, the amount you plan to save, the amount you plan to spend on food, clothes, gasoline, and any other expenses you plan to incur during the month until you have no income left in your budget.
This precise process will make tracking your money worthwhile because it only takes you a few seconds to find out where you stand with your expenses. Are you spending too much? Are you budgeting more than you need to for a particular category?
Such questions are easy to answer with a zero-based budget.
Record your daily expenses
Now that you have a zero-based budget, you need to get into the habit of logging your expenses daily. And when you record your expenses, you should deduct the amount spent from the appropriate budget category. If you get your budget right, it’s incredibly easy. And the more often you do it, the easier it gets.
I would advise you to keep track of your spending as soon as you can after making a purchase. Sticking to your budget will be simpler the more purposeful you are about keeping track of your expenses. Isn’t that the main focus here?
If you use a spreadsheet, write down your expenses every time you come home. If you use an app, open it the moment you spend money and write down those expenses. If you prefer to track your money manually, keep an expense counter with you and write it down as you shop.
I can tell you from experience that nothing improves the process of tracking your money like keeping a spending log. Make it a habit.
Keep track of any extra income
Every time you earn a little extra cash, put it toward your budget. After you’ve taken all necessary deductions from that money, divide it up into the budget categories you think make sense.
It makes little difference whether you invest it all in savings, add it to your budget for amusement, or distribute it all together. It must be accounted for in your budget.
Knowing exactly how much money you make and how much money you spend is the goal of keeping track of your finances. As a result, remember to record any additional revenue.
Find areas for improvement
If you’re going to track your money, do it to get your finances in decent condition. What would be the point?
You shouldn’t keep track of your earnings and spending unless you plan to utilize it to strengthen your financial situation.
Periodically, you should review your spending and look for areas where you can improve. For example, you may find that you don’t have enough budget for a certain category. Or perhaps you are spending too much on food. You may even realize how much debt you are paying off each month, and that getting out of it will be very good for your financial health.
Purposefully track your money and constantly look for ways to improve your financial habits.
Automate the process
Consider utilizing an app that syncs with your bank and credit card accounts if you frequently forget to record your purchases or if you feel comfortable letting go of the controls. Every purchase, savings transfer, and bill payment will eventually appear on your mobile or desktop app after a brief delay as the bank processes your transactions. The majority of systems also connect to investment and/or retirement accounts so you may monitor your net worth.
Numerous apps also classify your expenditure. This is useful if you frequently overlook one-time purchases even when you believe you have accounted for all possible expenses in your budget. Automatic linking prompts you to include a category for each spending and consider the big picture.