The one year I decided not to track my spending, my net worth decreased by half. After that, I got serious about it and started tracking every purchase - a habit I've kept up for four years. This is one of the major reasons my net worth has increased by 500 per cent in that period. Tracking your spending is, quite simply, the one thing you can do right now that will allow you to take control of your finances, achieve your financial goals, and turn money from a stressor into a source of excitement.
There is a famous quote from US management guru Peter Drucker: "What gets measured gets managed". Basically, if you don't know the data about any facet of your life, you can't take control of it. Many never track their spending; in America, for example, only a third do, according to a Gallup poll from 2013, and their finances just drift along. Listen to personal finance podcasts as much as I do and you'll notice every expert's first piece of advice is for people to track their purchases.
My advice is no different. That's I've seen the power tracking spending has. For something that takes me 30 seconds a day, it has a gigantic consequence for my financial life, even the areas beyond my bank account. My savings rate (the percentage of take home pay I keep and build my wealth with) went from taking a 50 per cent hit in the year I didn't track it, to saving over 60 per cent of my income each month this year. I don't say that to brag, but to show you the power of tracking your spending, a change of 110 per cent in my savings rate over five years.
There are many great reasons to track your spending, such as creating a strong net worth, the absence of debt and a happy life. Here are my top five reasons:
It stops impulse buying
When you see your savings goal shrink with every purchase, it makes you think twice about the thing you think you have to buy.
You know where your money is going
I didn't realise my car was my greatest expense until I looked at the data.
You can prioritise your spending
Once you know how you spend your money, you can change your behaviour. I knew I didn't want to spend as much going out at night, and when I saw how much it was costing me, I was motivated me to cut back.
It saves marriages
According to a 2015 survey from Sun Trust bank, financial stress is the no.1 cause of breakups, with over 35 per cent of relationship problems caused by money disagreements. If you know how much you spend and can talk about it openly with your partner, that communication goes a long way to avoiding any problems. Experts call this having a "money date" and they recommend it once a month. If you have the data, it's a much more productive conversation.
It helps you make a budget
Now you know how much you spend in each category (rent, transport, groceries, clothes, entertainment, etc), that information lets you craft a realistic budget to align your spending with your financial goals and values.
This all sounds great on paper, but how do you actually monitor your spending? It's actually quite simple and here are my tips to be an effective tracker:
Use an app
My two favourite are Spending Tracker and Pocketsmith. Spending Tracker is free and great if you're single. You can use any currency and it has a little calculator in it. It also makes great charts and breaks down your spending into handy categories. It seriously takes me 30 seconds a day to track my spending.
Pocketsmith is a little more sophisticated, and tracks of your international bank accounts, brokerage accounts and credit cards and expenses in one place. It's not free, but if you are married and have a more complicated financial life, this could be the tool for you.
Don't just have a food category. Break it down into restaurants, ordering food, groceries, work lunch and so on. Or for clothes, have work clothes. daughter's clothes, son's clothes, exercise clothes and more. This helps you pinpoint where your money is going far more effectively.
Update at the checkout
As soon as you pay, take out your phone and put in the expense. It takes 10 seconds.
Analyse the data every month
Take five minutes to review what you spent on. then compare it to previous months and years. This is how you notice trends, both positive and negative. From there, examine if your spending matches your goals and values and make changes it if things aren't going to plan.