If you’re like many Americans who vow to save more money and pay down debt in the new year, then you’ll want to start tracking your spending, a habit most financial experts agree is crucial to meeting your monetary goals. It’s also a habit most people don’t develop.
According to a Gallup poll, only a third of Americans make a detailed budget and track what they spend, despite a majority admitting in a Pew survey that they worry about their finances. Tracking spending “requires a lot of discipline and commitment,” says Michelle Jones, vice president of Bryn Mawr Trust. “I think sometimes people are afraid to find out what they’re actually spending their money on.”
However, in order to pay down your debt and manage your credit, you need to know where your money is going and where you can cut costs. Similar to keeping a journal while on a diet, tracking your spending may seem like both a daunting and tedious task. But, as with any new goal, breaking it into easy-to-manage steps can help get you started and keep you committed to meeting your financial goals in the new year.
1. Find the right tracking tool.
The first step in any kind of tracking is finding the right tool. For tracking debt reduction, you might want to start with a simple payoff calculator such as the one on this site. If you have debt on multiple cards, you can use a debt reduction calculator that lets you see how different payoff strategies (such as paying off the smallest debt first versus paying off the card with the highest interest rate) affect your overall costs. It then helps you come up with a plan for monthly payments.
For tracking spending, one of the simplest methods is old-fashioned pen and paper or a spreadsheet. Just make sure you ask for receipts for all of your purchases.
If meticulously logging your spending is not a habit you will keep, consider an aggregator app that will do the work for you. Online services including Mint, PocketGuard and Mvelopes will sync up with your financial accounts, categorizing and tracking whatever you spend using your debit or credit cards. With Mint, there is also a financial goals option that incorporates extra features if you are looking to pay off credit card bills or loans.
If you’re worried about the security of syncing your bank and credit card accounts, there are also apps such as Pocket Expense. It requires you enter your spending yourself, but will keep the information organized and easy to access.
“It doesn’t matter what method you use, what matters is the acknowledgement that this is important,” says Barbara Friedberg, former portfolio manager, author of “How to Get Rich Without Winning the Lottery” and personal finance blogger. “You have to have a personal commitment that you want your financial life to be successful.”
2. Track everything.
If you don’t use a card for all of your purchases, you’ll want to use a program that allows you to manually input what you’ve bought with cash. “That includes tracking the fun stuff, like your monthly gym membership or mani/pedi,” says Nicole Lapin, financial journalist and author of “Rich Bitch.” “You need to be able to see all of your spending to keep yourself on track, not just the typical stuff like bills and rent.”
You also need to track whatever you are spending in interest payments if you carry a balance on your credit cards each month. Knowing exactly how much extra you are paying when you carry debt will motivate you to curb impulse buys until you can become debt-free.
3. Categorize your spending.
Whether you’re using an app, a spreadsheet or a No. 2 pencil, you want to categorize your spending as much as possible. By knowing how much you are spending on eating out, groceries, clothing and even movie rentals, you can start getting a feel for where you can make cuts.
If you know for certain that you won’t stick with such detailed accounting, financial coach and former overspender Hilary Hendershott suggests simplifying the process. “I feel very limited by having budgets for everything I spend,” she says. “So, instead I have two categories: Yesterday’s Promises and Today’s Fun.” Hendershott says Yesterday’s Promises includes all regular bills like rent, utilities, gym memberships, car payments and subscriptions. Today’s Fun includes everything else, even gas.
While she says tracking is important to know how much you are spending a month, limiting your access to money for “Today’s Fun” will guarantee you don’t overspend. “I have a separate, spend-down account with a set amount of money I have allocated for all of these purchases. I have no idea how much I spend on dinners out, but I know how much money I spend every two weeks from my spending account. That sets me free to spend how I want to spend my Today’s Fun money.”
Her one hard-and-fast rule: No cheating. If she spends her allocated money too quickly, she forces herself to be creative until the next payday.
4. Track at regular intervals.
Whether you decide to track daily or weekly, make sure you do it regularly so your receipts don’t build up. If you are using an online app that does it automatically, then set a certain time each week to check the app or read the reports they email you, so the tracking can do its job of increasing your awareness of your spending habits. But you shouldn’t have to check in more frequently than that. “Analyze your tracking at the end of each week, not every day or you’ll make yourself crazy,” suggests Lapin. “As you begin to notice trends in your spending, you can reallocate funds to house payments or a savings account.”
Lapin says it’s also important to build fun money into your budget and not worry too much about small impulse buys that may give you pleasure. “A financial diet is like a regular diet: crash-dieting rarely works, and only leads to binging. Allow yourself the small indulgences.”
5. Start small and start now.
While planning how you are going to track is useful, the most important part of the process is starting as quickly as possible and setting realistic goals. “Start today,” says Friedberg. “Write down in your calendar every day that this is part of your daily schedule. If it’s written down, you’ll be more likely to see it as something that you need to do.”
If it helps set a deadline for tracking, then tell yourself you will try it out for one month. If your goal is to pay off a certain credit card or loan, then make that your target date for finishing your tracking. “Take baby steps to get yourself started,” says Friedberg.
To gain control of your finances and pay down debt, a little organization can go a long way. By gaining awareness of your spending habits, you can start making immediate changes in your financial strategy. If you’re paying off a loan or card, using an app that allows you to set a financial goal will help keep you abreast of your progress and keep you motivated to continue until you’re debt-free. While change may not happen overnight, it could very well happen by the time you need to start thinking about your next New Year’s resolution.