If the thought of sitting down to make a budget is overwhelming to you, you’re not alone. One poll found that only 32% of Americans maintain a household budget.
It makes sense. We’re all crazy-busy, and already spend more than enough time in front of our computer and telephone screens. Very few people get excited to come home and budget after a long, exhausting day at work.
Some folks may avoid building a budget because they don’t know where to start. Others may be struggling with finding the motivation to sit down and do it.
For those that don’t know where to start, here’s your first step: Track your spending. It is impossible to build a meaningful budget if you don’t know where the money is going in the first place. (Building a budget requires you assign dollar figures to spending categories, which you’ll need some sense of first.)
If you’re struggling with motivation, we’ll also cover the five reasons you should track your spending, along with some tips on how to track spending and ultimately, build out a budget plan.
Identify Areas That You’re Overspending
In every person’s spending hides some sort of gremlin, busting up budgets while lurking around completely unnoticed. And there’s no way to uncover the problem without spending some real time looking at the numbers. The truth is, spending is so easy and frictionless these days, that it’s nearly impossible to do mental accounting on how much we’re spending in each category and overall.
It’s not uncommon to hear stories about people who are tracking their spending for the first time who realize they are spending hundreds more in certain categories than they had anticipated.
For example, lots of people find they are spending more than they expected on dining out, Starbucks, groceries they don’t use, or shopping. Sometimes, the act of daily or weekly tracking alone inspires people to spend less.
What’s Measured Gets Improved
When it comes to spending less and saving more, the old adage holds true: what’s measured is what gets improved. There’s hardly a way to make meaningful change if you have no benchmark for which you can build from. Say, for example, that you want to spend less on dining out. That’s great, but how can you spend less, if you don’t know how much you spend now?
Only after tracking your spending for a time can you begin to build a meaningful budget. Think about building a budget without knowing how much you spend in each category! There would literally be no point.
For example, say that you guess that you spend $100 on gas each month. But if you had actually tracked your spending, you would know that you get gas once/week, and it costs $40 each fill. Really, you need to budget $160 for gas each month (or slightly less, if you are trying to reduce gas spending).
Feel Inspired to Make Eliminations
The shock of seeing how much you’re spending (and on what) may be the inspiration you need to make real changes. And perhaps these changes extend beyond simply nixing the daily Starbucks habit.
Use that motivation to eliminate unused subscriptions, to work on lowering your gas or phone bill, to cut out entire spending categories, to take public transportation more, or to consider more drastic measures—like getting a roommate or moving into a more affordable place.
Change is never easy to make, but it’s best to use the spark of motivation you first have when you realize that there are plenty of ways to cut back.
Give Yourself the Freedom to Spend on What You Love
Sure, budgeting can feel restricting at first. But eventually, you may come to find that budgeting gives you both peace of mind and the freedom to spend on exactly what you love.
Without a budget, it is possible to feel anxious every time you swipe your card, not sure if you can really afford this thing. With a budget, you can make a purchase knowing that you planned for it and that the money will be there.
Here’s what a lot of people get wrong: the tracking of spending doesn’t have to result in the diminishment of your pleasure. Instead, it’s about looking at how you spend, and assigning priority to those different expenses.
Ask yourself this question: In retrospect, was that purchase worth it? And what purchases weren’t? Again, eliminate the categories that don’t bring you utility or joy, keep the ones that do, and never hesitate to spend on those items again. Tracking and budgeting allow you this freedom.
Build Saving Into Your Plan
If you want to build savings into your monthly financial plan, but can’t imagine how, you have to begin by tracking your spending. Identify areas that you can cut back in so that you are then able to re-allocate those funds to your future.
Once you have found some spending categories where you can give yourself some leeway, practice moving that spare cash into a savings account at the end of the month.
After a month or two of this, you’re ready to truly build savings into your budget, through automation. To do this, set up an automatic transfer of funds from your account, scheduled a few days after your paycheck hits.
Now, you can do as Warren Buffet says: “Do not save what is left after spending, but spend what is left after saving.” Building automatic saving into your monthly financial plan is always best, but monitor to make sure you don’t overdraft your account.
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Tips and Tricks On How To Track Spending
Start By Gathering Account and Income Information
If you want to make a personal budget and keep track of spending, your first step is to know exactly where money is moving both to and from. Gather up information on checking accounts, credit cards, online mobile transfer accounts (like PayPal), and so on. Organize your information and make sure that you can log into all of your accounts.
While you’re at it, make sure that you have all sources of income accounted for. Know what these figures are both before and after income and other taxes. It will be up to you whether you budget with after-tax income or pre-tax-income (and consider taxes a line item in your budget), but start with both figures.
Track Last Month’s Income
Instead of starting in the middle of the month, begin by looking at the most recent full month’s worth of spending. Practice putting money into categories like groceries, entertainment, dining out, bills, etc.
You may want to practice doing this in a few different ways. A good way to start is by downloading all of a month’s spending into a spreadsheet. (This should be an option provided by your bank, usually under the “statements” tab or something similar.)
This method requires more upfront work, but forcing yourself to sit with the numbers and manually identify transactions is an important skill to learn. You can also switch to using an app like SoFi Relay.
Determine Your Categories
After looking through last month’s spending and putting transactions into categories, determine how much you’d like to spend in each category. These categories can be as broad or as narrow as works for you and your budgeting style. Don’t forget to account for expenses that don’t happen monthly (like semi-annual car insurance payments) and incidentals.
Increasingly, folks do their shopping at stores like Target or on Amazon, where spending doesn’t fit nicely into one category. During one trip, you could easily buy groceries, toiletries, clothes, and furniture. This makes it hard to budget by category. In that case, consider giving yourself a budget by store.
Get Into A Groove
Maybe you’ll continue to update your spreadsheet with downloaded information from your account, and this is the tracking method that you’ll stick with forever.
Perhaps you’ll find something that you like better, such as app or program. To figure it out, you’re going to have to try it all out. This will be hard in the first few months—give yourself the space to feel frustration—but know that it does get easier over time. The good news is that money-tracking technology is getting better and more helpful and there are many solutions you can check out.
SoFi Checking and Savings
SoFi Checking and Savings® is one option to check out. It is a bank account online that comes with a dashboard that provides weekly expense tracking and members can earn up to 1.50% APY.
After a few months of tracking, you’ll have a better idea of how to put purchases into categories that work as part of a bigger budgetary system. For most people, this will be the hardest part, but it will be worth it. You’ll get into a groove, feel in control of your spending, and finally be able to say, “I am confident in my ability to keep track of my spending.”
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