For more years than I like to admit I did not have a good grasp on where my (and after getting married “our”) money was being spent. I did the basics to track our monthly bills including our credit card statements and made sure we didn’t overspend our income or overdraft our checking account. But what I didn’t have was a detailed understanding of the categories in which we were spending more money than others and how much we were spending in each category.

The impetus to start tracking our individual expenses came when we decided to take the leap and establish our first annual budget. However, you don’t have to wait as long as we did to start tracking your own expenses. Tracking expenses is a positive personal finance step that you can take regardless of whether or not you have your own budget.

Why Track Expenses?

Know Where Your Money Is Going

Trust me, if you haven’t tracked your detailed expenses before it will be eye-opening. You may think you have a decent feel for how much money you are spending in certain categories, but it is amazing how even little expenses can add up. Long ago, when people bartered for goods, it was easy to see what was spent (traded away) vs. what was received (traded for). Even when cash was king as recently as a couple decades ago there was a physical exchange on both ends. You had a specific amount of cash at the start and when your cash was depleted you at least knew exactly how much you had spent even if you didn’t remember specific purchases.

Now we live in the age of credit cards, electronic payments, and e-wallets. You simply slide your card into a slot, hit a button on your phone, or wave your mobile device in front of a pad and your money is electronically transferred to someone else. Repeat those actions a couple times a day every day in a month and all of a sudden you may have spent hundreds or thousands of dollars without realizing it.

Categorized Expenses

When you track every expense you start to see patterns emerge that can evolve into category line items in a household budget. Sure, many family budgets will have common categories such as mortgage/rent, groceries, gas, education, and babysitting, but you will also find unique categories that apply to your family. Maybe your kids are into sports and so you have a category for sports fees (those swim lessons add up). Or perhaps you have a blossoming virtuoso on the violin and you decide to track music lessons and violin expenses as a separate category. I recommend letting your categories develop over time versus trying to assign every expense into the perfect category at the start. You will find that new categories appear over time and some categories fade away as your priorities change, your kids grow, and your lifestyle evolves.

Empirical Evidence For Your Budget

It is difficult to create a household budget if you don’t already have a good handle on your current income and expenses. Income is typically better understood even by families who do not have a budget. Many people have an hourly or salary-based job that pays a steady wage and even those paid on commission may have a pretty good idea of how much they make in a typical time period, e.g. month. However, on the expense side, every family is different. Only by tracking your expenses can you see where your money is going on a regular basis. This empirical expense evidence will  give you insight into where your money is going today and provide a basis for the numbers you plug into your budget for each category.

Let’s say you are trying to reduce your annual spending and you think eating out would be a good category of expenses to cut. If you are not tracking your expenses how do you know if the amount your put into that category in your budget is less than what you currently spend? Might it be even more than your average monthly spend? If you are diligently tracking and categorizing your expenses you would know how much you typically spend eating out each month. With that knowledge you can set a budget goal that is both feasible and realistic for that category.

How To Track Expenses

Online

There are a number of online tools that make it easier to track your expenses; at least the expenses that are able to be pulled from other online sources. Mint was one of the first and has survived the onslaught of newer competitors. A tool that has gained much popularity specifically within the Personal Finance / Financial Independence space is Personal Capital. And, one of the newer tools to hit the (app) market is Wally. The single page website and mobile app-only approach focuses on a younger, on-the-go audience.

There are definitely pros to using one of the online websites/apps to track your expenses. The biggest benefit is more automation and less manual tracking. With Mint and Personal Capital, you supply them with access to your financial accounts including checking, savings, and credit. They take it from there pulling data from those accounts and aggregating it for your review.

With Wally you manually enter your expenses, however, they have other benefits that make expense tracking easier. Wally uses geolocation to track the location of the expense and attempts to populate the location automatically when you make subsequent purchases at the same merchant. The app also allows you to take photos of your receipt and attach it to the expense for more granular expense tracking. The photo functionality can be very useful at big box stores, department stores, and specialty stores that sell a variety of goods. If you, for example, have different categories for clothing vs. home decor vs. electronics you might end up purchasing items across all three categories on one receipt from Target or Walmart (been there, done that). Snapping a quick pic of the receipt allows you to go back later and break down the one big purchase into the three different categories.

Manual

There are definite benefits to tracking your expenses online. I spent a couple years our household expenses in Mint about a decade ago and I’m sure I’d love some of the new tools they have developed since then. For the last few years, however, I have tracked our household expenses manually. Maybe I’m a glutton for punishment. Maybe I just like to spend an inordinate amount of time transposing expenses into Excel.

I don’t have a fancy Excel template that I use for tracking our expenses. It’s a single worksheet with four columns for expense data and a column to divide the expenses based on whether the expense was paid for in cash, out of our checking account, or with one of our credit cards.

Over time, I have found that tracking our expenses manually has given me a number of advantages vs. online tools.

Tracking Cash Expenses

Obviously, the online options have no way to automatically import any expenses you pay for in cash so you’re stuck entering them manually. Like many others, we try to put everything we can onto a credit card to capitalize cash back and travel rewards. For those expenses that cannot be paid with a credit card our second option is our checking account. Sometimes, though, you just need cash whether it is for an activity at school, a tip for the hair stylist, or meeting a stranger in a random parking lot to purchase their used exercise ball off of Facebook Marketplace. In our spreadsheet we have a section where I enter each cash expense with its appropriate category. It’s easier and faster in this case to type a row into Excel than using the web interface of an online tool to enter cash transactions.

Bonus Tip: We recently started keeping a post-it note and a pencil next to the jar where we keep our cash. We record our cash transactions on the post-it note immediately whenever we put cash in or take cash out. We capture the reason for taking cash out, the amount taken, and keep a running balance of cash in the jar. The running balance has been key since it lets us know when we have omitted capturing a transaction and then we can think back and try to remember what we missed. Every week or two I input those transactions into our expense tracking spreadsheet. We have found that keeping the post-it note and a pencil near our cash has greatly increased our consistency in capturing expenses vs. having to go to the computer and enter every expense into the spreadsheet individually as they occur.

Full Control Over Categories

Tracking expenses manually in Excel means that it is our spreadsheet so we can have categories for whatever we want. We can have standard categories like mortgage, car payment, and groceries. But we can also have our own custom categories. My wife enjoys running and so we have a “Races” category that tracks how much she spends on race fees throughout the year. We have “Swim Lessons” and “Kid Activities” categories for some of our kids’ expenses. Some online tools restrict you to only the categories they define. While you may be able to shoe horn all of your expenses into the categories they give you, tracking expenses manually allows us to have full control over our expense categories.

Greater Awareness of Expenses

Certainly I spend more time manually tracking my expenses than someone who allows a third party to automatically pull expenses into a single view automatically. Those automated tools even do a great job assigning categories for most expenses, especially ones that it has seen before. I would argue, however, that manually tracking expenses gives me a greater awareness of our individual expenses since I see and process every expense. I view the expenses that make up each category in a month and can even spot irregularities that might point to a larger issue.

For example, last year I spotted an expense on my wife’s credit card for a cake store that I had never heard of before. I checked with her to see if she ordered a cake for us or someone else and she had not. It wasn’t a huge expense, maybe $30 or so, and it could have easily gone unnoticed in the overall pool of expenses in a month. She called the cake company as well as her credit card and it was indeed a fraudulent charge. The credit card company reversed the charge and sent us a new credit card. We didn’t lose that money or risk future fraudulent charges thanks to noticing something that just didn’t seem right about an individual expense.

Flexible Data Analysis

Having our expenses in our own spreadsheet means that I can analyze the data in any way I like. It also allows me to use the expense data as inputs into other financial analyses without having to export the data from an online tool. For example, I like to track expenses that I consider as a result of both of us working full-time vs. expenses that are not related to us working. Work related expenses include items such as paying for before and after school care at the school, babysitting, train station parking, and train passes. Those are expenses that would go away should we reach a point where we do not work 9-5 jobs any longer. I typically exclude those expenses when calculating my FI (financial independence) number, which is easy to do within my own spreadsheet.

Another way I use the expense data for other calculations includes my monthly savings analysis. Each month I calculate our year-to-date savings rate, both gross (before tax) and net (after tax). I also calculate the amount our net worth has changed year-to-date from us saving money we earned through our jobs as well as the net worth impact of our existing investments. One of the inputs to the calculations is a year-to-date total of our expenses. I simply pull that number from the expenses tab in the same spreadsheet and I’m all set. No exports, no downloading, no reformatting. The raw data is there for me to slice, dice, and analyze however I like.

Security

It seems like every couple months we hear about the latest company to have personal information about customers stolen by hackers. When using these online tools to track expenses you have to be aware and comfortable with the fact that you are handing over sensitive personal information to a 3rd party. Not only do these tools have your complete set of usernames and passwords to connect to our various financial institutions, but they are then pulling sensitive financial information from those institutions and storing the data on their servers.

I am sure that these companies are doing their best to keep this information secure since their reputation and company future is at risk. However, a single hacker can always react faster to new security holes than a large company. When I keep our expenses in an Excel spreadsheet on our own computer on a local hard drive I’m not exposing our personal and financial information to the same risk as storing it in a single repository on some company’s server farm.

Start Today

You can start tracking expenses at any time. If you start at the beginning of the year you can capture the whole year as you go. If you start at the middle or end of the year you can choose to start from the current month and go forward. Or, you can go back to the beginning of the year, pull in the expenses up to the current month, and by the end of the year you’ll have a year’s worth of expenses to build on. As the saying goes “Time is money”, and, whether it’s via online tools or manual spreadsheets, tracking your expenses is time very well spent.