You need to track your spending. Every penny. This piece of PF wisdom goes back ages and has been refreshed time and again by various finance gurus. While I am certainly no finance guru, I do agree whole-heartedly with this little gem. It sets a firm foundation for building good financial habits.
Why you should care:
It all ties neatly back to the Balanced Money Formula, particularly the “reducing expenses” piece. How can you reduce expenses without understanding what your expenses are? Sure, you know how much your rent or mortgage costs, but what about all of those variable expenses? Gas, groceries, and utilities all change a little from month to month. Do you really know how much the odd little purchases here and there are adding up and impacting your bottom line? Maybe, but probably not – unless you are tracking.
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My pitiful story:
I got started on spending tracking when I started my first job at 16 years old. My mom took me to the bank and helped me open my first checking account for stashing my weekly paychecks. She sat me down and explained all about debit cards and how I needed to track my spending so that I didn’t accidentally overdraft. The checking account came with a little pocket book register, and I would dutifully save all of my receipts (gas, McDonald's, etc.) and enter them by hand, line-by-line making sure to update the column that tracked my balance.
That is, until I didn’t. It was sooo tedious entering all of those little four and five dollar entries by hand. It was just four dollars, I told myself. It couldn’t make that big of a difference, right? Like many 16 year-olds, I was wrong. I overdrafted, and got fined $35. That was more than I made in an entire shift in my minimum wage job. And I had just thrown it away because I was too lazy to write down my latte habit. I would like to tell you that I learned my lesson right away and never overdrafted again. However, in addition to being lazy, I am also stubborn, and it took me a few more $35 hits to truly learn my lesson.
Overall, my laziness and inattention cost me well over $100. That is just too much money to throw away. Eventually, I got better about tracking my account balance. But it was still tedious, and I still hated it.
Better living through technology:
I spent years tracking every penny that passed through that checking account in a regular old composition notebook, and can attest that it was a very unpleasant chore. However, now we have technology; there are so many better ways. For the last several years, I have been using Mint.com to track all of my expenses. If you aren’t familiar with it, Mint is a free online service that will automatically retrieve and organize transaction data from whichever of your bank accounts you fancy to track.
You can use Mint to automatically categorize your spending so that you can see how much you spend in different areas. You can set budgets for different categories and Mint will automatically alert you if you approach or exceed your limit. It also has very simple graphical and tabular displays that send chills up my nerdy little spine. I love Mint; it takes all of the tedious data logging out of spending tracking. All I have to do is sit back and geek-out on my neatly organized finance data. It’s every lazy girl’s dream.
Time for action:
Once you see how you are spending, then you can start to take steps to reduce spending in targeted areas. But more on that later. For now, you need to go open a Mint account, and I need to figure out how I’ve already reached my fast food limit.