3 Ways To Track Your Expenses To Build Wealth – How I Spent $50,000 Last Year
If you want to become better at managing your money and ultimately put more of it in your pocket, then you need to learn to manage your expenses. All too often people want to jump ahead in their financial journey and wonder why they aren’t building their wealth. The reason? They haven’t mastered the basics yet, like managing their expenses.
Three ways you can manage your expenses are:
- Breakdown your expenses into discretionary (wants) and living (needs).
- Outline your expenses into categories such as fast food, leisure, gas, etc.
- Track your expenses down to the month and then segment them from there.
In the list above, we are doing the bare minimum for managing your expenses. Actually the bare minimum is just tracking your total expenses, but we aren’t going to do that because we are smarter than that. From there, we add in more and more complexity to give us a better picture of our spending. I listed managing your expenses in my 10 Things Every 18 Year Old Should Know About Money because this is seriously that important. Even though that article was aimed at young adults, this skill is for everyone. It doesn’t matter if you are 18 or 48, you should know how to track your expenses.
What I want you to understand is that you should do whatever works for you. No matter who you listen to, read or watch, their system won’t work perfectly for you. I’ve mentioned 100 times that we are all different and we all need to have our own system tailored to what works for us.
In this article, I’m going to show you my actual expenses from last year broken down at those three different levels. Yes, my real numbers and spoiler alert; I spent over $50,000 last year!
The screenshots below are all from my money management spreadsheet. I use a tool called Tiller Money which I’ve talked about many times before and have even made a couple of YouTube videos on. If you want to learn more about Tiller and try it for FREE for 30 days, then check out these resources:
- Tiller Money – The Best App To Manage Your Money? – Blog Post
- Tiller – Best Way To Manage Your Money? + FREE TRIAL – YouTube Video
Additionally, I cover all of the tactics used in the article plus MUCH more in my course Money Made Easy. If you’re interested in once and for all learning how to manage your money then you need to check out that course. You can do that by clicking the image below.
3 Ways To Track Your Expenses
Wants vs. Needs
Let’s start this off by talking about the bare minimum. Tracking your wants vs needs can be an eye-opening experience and I think most people avoid doing this simple task because they already know what the numbers will say.
All humans have wants that don’t necessarily also qualify as a need and there is nothing wrong with that. Personally, I pay for a monthly membership at a country club to golf. Do I NEED to have that membership to live? Of course not, but it brings happiness to my life and I have built it into my budget so I can afford it. Regardless, it is still a want. My point is that even though I don’t need it, I still should track it and be conscious of my spending.
Enjoy going to concerts? No problem just track it.
Like eating at fancy restaurants? Sounds delicious, now write it down.
Have fun taking road trips? Put it down, then tell me where we’re going next!
As you can see in the chart below, I break my finances down into four different transaction types. They are:
- Discretionary (Wants)
- Living (Needs)
- Rental (Business)
- YD&NB (Business)
For most people, just splitting your expenses into wants and needs will suffice and will be more than most people do. From there, you can see what your spending looks like as a comparison. Even from a high level, you can see things that can be (but don’t necessarily need to be) adjusted. For example, I spent $17,000 on wants last year alone! How is this even possible?
Well, in my wants category, I include things like eating out, drinking, golf, and travel. These things add up but I know I could cut them out if I need to.
This is a liberating feeling because I know I can cut them if I need to but I don’t have to because they fit into my yearly spending plan. In short, I’m managing my money but also enjoying life every day. This goes to prove that you can be frugal, smart with your money and still have a fulfilling life.
Expenses By Category
I mentioned above that my discretionary category holds things like fast food and alcohol. In this next view, I expand each category to have a better idea of where I’m spending and on what over the year. I have a sneaking suspicion that if people saw how much they spend on fast food, in particular, each year they would be shocked.
Even to myself, spending $3,300 or $275 a month seems excessive. Side note, I do put any money I spend on dates in this category so it’s worth every dime ????.
Breaking things down into an individual category that is more detailed than just want and need, allows you to take action. For example, if you see that you spent quite a bit on alcohol last month maybe you consciously decide to spend less next month to save money. Only buy drinks on Fridays or restrict yourself to happy hours.
If you really want to make a change you could cut something out completely. If I wanted to save $2,500+ this year I could either cancel my golf membership or not travel at all. Both of these choices would vastly cut my spending.
Will I do that? Probably not because I have found a balance and maintained a 25% savings rate throughout the year. Finding that balance is what it is all about. If you’re making yourself miserable, what’s the point?
Expenses By Category and Month
The last way I would suggest people look at their finances (and how I personally do) is expanding your view out to a monthly basis. In the picture below, I do this for every category and then total everything up on a yearly basis. Yes, I’m aware the picture is small and you are going to have to zoom in.
The point of sharing is to give you a real idea of ways you may want to track your expenses.
It’s important to note that you can do this for your whole financial story. What is stopping you from adding in your income each month? Or your net worth? Or even your savings rate? Think about the completeness of that picture.
Tracking your finances doesn’t have to be a complicated mess that results in no change. It can be as simple as this one chart.
What this chart allows me to do is change my actions from month to month. If I can see that I overspent in the Tacobell drive-thru last month, then I’ll cut it out this month. I don’t have to wait until the end of the year until it is too late.
Having an expanded view, that automatically updates has been, and will continue to be, a game-changer. Personally, I’m a frugal person and I have swung towards being cheap in the past. Having this view allows me to live life and still be conscious of my spending every single month.
This removes the anxiety and stress that causes most people to avoid managing their expenses in the first place. It gives me balance, peace of mind, and knowledge to make better decisions.
Managing Your Expenses Will Only Get You So Far
Managing your expenses is about understanding how much you spend and what you spend it on as I showed above. What tracking your expenses does is teach you how to manage yourself and your money. It builds habits.
If you have reached a place where you are happy with how much money you spend then congratulations, you are now a part of the 1% that understands their expenses. Now I would challenge you to go out and find ways to improve your financial situation on the other side of things and increase your income.
I would not be doing you any favors if I didn’t mention that cutting your expenses can only get you so far. At some point, there isn’t anything left to cut out and you still need to live. Most people’s attention is focused on get-rich-quick schemes or shortcuts that ultimately leave them in the same position that they started in. They buy products from gurus to teach them how to make money when all they are doing is putting more money in someone else’s pockets.
The great thing about income is that there is unlimited upside. In theory, you could earn billions and trillions of dollars and obviously, there isn’t that same amount of expenses to cut out.
Am I saying that earning that much should be your goal? Of course not. We want to be realistic here. But I have, and will continue to, highly suggest people go out and find other sources of income. Take some chances because you never know where they will lead you. To learn more about building multiple streams of income, passive income, and starting a business from home check out these resources:
- How To Build Multiple Streams Of Income In Your 20’s
- 5 Passive Income Examples You Can Start Tomorrow
- Why You Should Start A Business From Home Today
The Bottom Line
I fully believe that finding a way to track and manage your finances is one of the key building blocks that will enable you to build wealth. Is it always a fun activity to do? Definitely not but that is why I use tools like Tiller to do all the work for me.
Before I wrap this article up, I want to mention a couple of things that should help you get started.
The first is that this isn’t going to happen overnight. You aren’t going to wake up one day and all of a sudden be perfect at managing your expenses. This process has taken me years to know what I’m doing and I still have room for improvement. Take it one step at a time. Even tracking your total expenses month to month is a step in the right direction.
Secondly, build a process that works for you and only you. I know I’ve said it one hundred times but it’s the truth. If you noticed, I never once said in this article that these are the best and only ways to manage your expenses. That would be an outright lie. The point was to give you just a couple of possible options and examples so you can use these ideas if they work for you.
Lastly, it’s all about balance. Far too often I see people become cheap when managing their expenses and they forget to enjoy themselves. Or the other end of the spectrum, not managing their expenses at all and getting into money trouble. None of us want to work our whole lives but it’s not worth giving up your whole life now for work. We all need to find that happy medium that allows us to responsibly live a fulfilling life.
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