An expense tracker is an incredibly useful and practical financial tool. The main purpose of an expense tracker, also known as a finance tracker, is to identify where you are spending your money, and from there, you can identify ways or opportunities to save or invest more of your money and reduce your cost of living.
If you were to track your expenses over a specific period of time, such as 90 days, you may be surprised with what you’re spending your money on. Getting a better understanding of your personal finances can be extremely helpful, and an expense tracker is a great way to get fully acclimated with your spending and savings habits.
What Is an Expense Tracker
An expense tracker comes in various forms. Today, some banks have an expense tracker tied directly to your credit or debit card. There are also apps that you can link your financial information to that will track your expenses every time you swipe your card.
Tracking your expenses in a spreadsheet is another common approach to expense tracking, although creating a personal expense tracker in a spreadsheet software (such as Excel or Google Sheets) is a bit more time consuming as it will require you to manually enter the expense and category.
However, you’ll have more control of your data, and can become hyperfocused on your categories – which we’ll touch on in greater detail below. No matter what you use for expense tracking, one thing is for certain.
The expense tracker should not only record how much money you spent on a given transaction, it should also record what you spent your money on. Categorizing your expenses is vitally important.
Categories for the Expense Tracker
There are a variety of categories an expense can be bucketed into in your expense tracker. Here are some common categories:
Rent / Mortgage
This number typically doesn’t change month over month, but it’s still helpful to record how much money you’re spending on your monthly rent or mortgage payment.
Essential expenses are the expenses you can’t live without. Although you can’t avoid these expenses, there are ways you can reduce the overall expenses.
Essential expenses can include:
Non-essential expenses can also be referred to as discretionary spending. Common categories include:
- Dining out
- Purchasing new clothes
- Purchasing personal items, or services
There are some recurring bills that are essential and others that are non-essential but greatly appreciated. For example:
- The internet or cable bill
- A gym membership
- The water bill
The primary purpose of tracking your expenses is to identify any bloat in your spending. You may not be able to eliminate an expense entirely, such as your internet expense, but you may be able to shop around or have the rate reduced.
Identify any Trends
Once you have some data recorded, such as 60-90 days of expenses, you can begin identifying trends in your spending patterns. For example, you may realize 15% of all your net income is being used on dining out.
Reducing that expense can save you a substantial amount of money. Or, you may realize an expense is costing more money in the present day than it did a few months ago. Perhaps your internet expense increased because you are now out of contract. You may be able to receive a reduced rate if you sign another one year contract.
Although recording this data manually in a spreadsheet is a bit more time-consuming, it may be easier to identify trends and look at historical data. Many apps that link directly to your debit or credit card can also email you a spreadsheet version of your data so you can perform your own analysis.
Reduce Your Cost of Living
When you have more visibility into what you’re spending money on, and how much money is being spent in that area each month, you can begin to reduce your cost of living. There are a variety of ways you can reduce your expenses, and being more mindful of what your expenses are is the first step you’ll need to take.
Beyond that, each expense needs to be handled with a bit of nuance. There is not one switch you can flip to begin saving all of your money, but there are steps you can take to help you save more money.
For instance, following the dining out example mentioned above, if you realize you are spending too much money each month dining out, there are numerous ways you can reduce that bucket.
You may need to start cooking your meals in advance, packing a lunch to work, or hosting a dinner party at your house to connect with friends. You may notice your grocery expense increasing, but all in all, you should still see a net benefit by cooking more meals at home and dining out less frequently.
Save More, Invest More
The more money you save, the more money you can invest. Expense tracking is a great discipline to have when working on your personal finances.
Investing can help generate long-term wealth or additional monthly cash flow. However, investing can be complicated.
If you’re unsure where to begin investing money, or what investments are best suited for your goals and risk tolerance, consider working with a certified financial advisor. A certified financial advisor will take a deep dive into your finances and will work with you to identify bloat in your spending habits, and which investment opportunities are best suited for you.