Tracking expenses is a crucial aspect of effective budgeting and financial management. It provides an accurate picture of where your money is going, enabling you to allocate funds appropriately for bills, groceries, rent, utilities, and other necessities. By categorizing your expenses into needs, wants, and savings/debt, you gain insight into your spending habits and areas for potential cost-cutting. So, How to Track Expenses?
Budgeting allows you to account for all your monthly expenses, including fixed costs like mortgage or rent, insurance, and debt payments, as well as variable expenses such as dining out, entertainment, and subscriptions. Creating a comprehensive budget empowers you to take control of your finances, reach your goals, and achieve peace of mind.
Analyze Your Expenses
Review Account Statements
To effectively analyze your expenses, the first step is to pinpoint your money habits by taking inventory of all your accounts, including your checking account and all credit cards you have. Looking at your recent bank and credit card statements will help you identify your spending patterns and ensure you don’t overlook any recurring expenses. Conducting regular bank reconciliations and accounting audits is crucial for maintaining accurate financial records, as it allows you to compare your internal records against your bank statements and spot any discrepancies, errors, fraud, or inconsistencies.
Categorize Fixed and Variable Expenses
Your spending will consist of both fixed expenses and variable expenses. Fixed expenses are the predictable, recurring costs that typically stay the same in your budget from month to month, such as mortgage or rent payments, loan payments, utility bills that don’t fluctuate, recurring subscriptions, insurance premiums, day care or ongoing child care, monthly prescription medications, and automated transfers to savings. These expenses are less likely to change from month to month and tend to take up the largest percentage of your budget.
Variable expenses, on the other hand, are inconsistent and harder to forecast. They could fluctuate, like your heating bill being high in the winter but low in the summer, or occur infrequently, like surprise car repair costs or charges billed annually or quarterly. Examples of variable expenses include credit card payments (unless you pay the same amount each month), utility bills that vary each month (such as water or energy bills), entertainment (dining out and tickets to events), travel, car maintenance or repair, and emergency medical, dental, or veterinary expenses.
Begin by grouping your expenses into different categories, as categorizing your expenses will help you not only track how much you’re spending but also see where your money is going. Some personal finance websites and credit cards automatically tag your purchases in categories like “department store” or “automotive” to help you identify themes. You might find that those impulse buys at Target are costing you a lot, or maybe you’ll realize you’re paying for recurring subscription services that you could do without.
Another way to categorize your expenses is by breaking them down into needs, wants, and savings/debts. This way of categorizing and tracking your expenses is known as the 50/30/20 budget, which you’ll learn more about in the next step.
Create a Monthly Budget
Allocate Funds for Needs, Wants, and Savings
The 50/30/20 budget rule is a popular framework for allocating your after-tax income effectively. It suggests dividing your funds into three categories:
- Needs (50%): These are essential expenses you must pay, such as rent or mortgage, utilities, groceries, transportation, insurance premiums, and minimum debt payments. This category should account for up to 50% of your after-tax income.
- Wants (30%): These are discretionary expenses, like dining out, entertainment, subscriptions, hobbies, and vacations. Allocate no more than 30% of your income for these non-essential but enjoyable expenses.
- Savings and Debt Repayment (20%): Set aside at least 20% of your income for savings, investments, emergency funds, and debt repayment beyond the minimum payments. This category includes retirement contributions, building an emergency fund, and paying off debts more aggressively.
Use the 50/30/20 Budgeting Rule
The 50/30/20 rule is a straightforward guideline to help you manage your money effectively. Here’s how you can implement it:
- Calculate Your After-Tax Income: Determine your take-home pay after deducting taxes and other mandatory deductions. This will be the basis for your budget allocations.
- Allocate 50% for Needs: List out your essential expenses, such as rent, utilities, groceries, transportation, and minimum debt payments. Ensure these expenses do not exceed 50% of your after-tax income.
- Allocate 30% for Wants: Identify your discretionary spending, like entertainment, dining out, and hobbies. Limit these expenses to no more than 30% of your income.
- Allocate 20% for Savings and Debt Repayment: Contribute at least 20% of your income towards savings, investments, emergency funds, and additional debt repayment. Automate this process by setting up automatic transfers to your savings or investment accounts.
- Track and Adjust: Monitor your spending regularly and adjust your budget as needed. Consistency is key to making the 50/30/20 rule work for you in the long run.
By following the 50/30/20 budget rule, you can prioritize essential expenses, indulge in some wants, and work towards your financial goals simultaneously. It’s a simple yet effective way to take control of your finances and achieve long-term financial security.
Cut Unnecessary Expenses
Cancel Unused Subscriptions and Services
Most people have monthly subscriptions for cable TV, streaming services, internet, cell phones, publications, weight loss programs, and more. Once set up, these subscriptions often go unnoticed, yet the money continues to come out of your account every month. Now is the time to take a close look and ask yourself: How much do I use this? Do I really need this? Can I live without this? When you cancel an unused subscription, go through your email and unsubscribe from newsletters or regular advertisements that come from that source. Don’t pass on unsubscribing just because they make it difficult or because it seems like a small expense not worth the trouble. Think of cutting expenses as death to debt by a thousand cuts, not one big blow.
Here’s an easy one: Identify any magazines, streaming services, or memberships you aren’t using very much or anymore, and cancel them. If it’s been months since you actually used a product or service, or if you can find a cheaper version, get rid of it. If you find that you miss it later, you can always re-subscribe when your finances are more stable. Even though they aren’t costing you money directly, drop any email newsletters or merchandise catalogs that tempt you to make impulse purchases.
Don’t forget about your cable bill and cell service. Can you get a cheaper plan from another provider or downsize the plan you have? Consider cheaper TV alternatives, but be careful not to load up on too many streaming subscriptions. Evaluate which streaming services you actually use and cancel those you haven’t touched in a while to save money each month. You can typically reduce your cable and internet costs if you bundle those services with the same provider, or by switching to a lower internet speed tier or opting to buy a modem rather than renting one from your provider.
Reduce Monthly Bills and Utilities
Electricity costs account for about 12% of the average household budget. Some immediate things you can do to cut those expenses are: Don’t leave the computer running, don’t run the dishwasher or electric dryer without a full load, hang out the laundry instead of using the dryer, turn down the thermostat, and reduce the temperature on your water heater. Shop around to see if there are utility providers that offer lower rates, particularly for fuel.
When incandescent light bulbs burn out, replace them with LEDs. They cost more to buy but last longer and use less electricity, more than paying for themselves. To choose the right bulb, use the lumens number, which indicates the amount of light emitted, rather than wattage, which measures the electricity used.
Save on your A/C bill by installing a programmable thermostat for your heating and cooling system. This enables you to change how hot or cold you keep the house when you’re not at home, saving on utility bills. You can set it to return to a more comfortable temperature just before you get home from the office, which can really help you save energy in the winter months and have a big impact.
Unplug every unused electrical device, as many electronic devices draw a small amount of electricity when not in use, and it adds up. Another way to block that excess electricity is using power strips or timers to turn devices off and on. “Smart” power strips can manage electricity so that DVD players only get power if the TV is on.
Lower the temperature on your water heater, as you probably don’t need it hotter than 130 degrees Fahrenheit, so it burns unnecessary energy to keep it hotter. Using a water heater blanket and insulating hot water pipes also saves energy.
Seal energy leaks in your home by caulking and weather-stripping doors and windows that leak air, sealing air leaks where plumbing, ducting, or electrical wiring comes through walls, floors, and ceilings, and installing foam gaskets behind outlet and switch plates on walls. Turn your lights off when you leave a room, and repair leaky toilets and faucets. Take shorter showers, and if it’s time for a new dishwasher or washing machine, buy one with an Energy Star rating to save water.
Lowering your housing costs is a heavier lift than trimming your grocery bill, but doing so can yield big savings. Learn how you can save on your rent, mortgage, and homeowners insurance. Your monthly utility bills are a smart place to look for quick savings, as small tweaks like adjusting your thermostat or signing up for automatic payments can add up to major savings.
Sign up for automatic payments, as many wireless carriers, including Verizon, AT&T, and T-Mobile, offer monthly discounts on select plans when you sign up for automatic payments. Check with your cell phone provider to see if they offer a less expensive protection plan, as standard insurance may provide enough coverage and is often a few dollars less expensive than premium options.
Take inventory of your cell phone plan and data usage, then see if you can get a better deal with your carrier or another one. Switching to a prepaid service may lower your cell phone bill even further. Dropping the temperature a few degrees at night or when you’re away can lower your heating bill, and doing the same on your water heater can also help lower your heating or gas bill.
You may reduce your average electric bill with a smart power strip, which shuts off power to devices not in use. Also, consider requesting an energy audit from your utility provider to get household-specific insights. Long commercial breaks, inconvenient broadcasting schedules, and mostly reruns? Cut the cord and end your cable contract instead of renewing. You can get free local channels with a digital antenna and pick up a la carte streaming services to watch your favorite shows for a fraction of the monthly price of cable.
Manage Debt Effectively
Prioritize High-Interest Debts
Typically, it’s advisable to prioritize high-interest debts, as they cost more over time. This is known as the ‘avalanche’ method of debt repayment, where you pay off debts with the highest interest rates first while making minimum payments on others.
- Order your debts by interest rate. Start with the highest rate and work your way down to the lowest rate.
- Start chipping away at your highest-interest debt first. Use any extra money you can find to pay down your highest-interest debt. Every dollar counts. Once you pay off that credit card or other high-interest debt, put the money you were paying on your highest interest debt—the minimum plus the little extra—towards the debt with the next highest interest rate.
- Work your way down the list until you’re debt-free. Repeat the process until you work down to your lowest-interest debts, like other consumer debt and student loans.
Interest charges can make carrying multiple debts very expensive, so prioritizing your repayment efforts is crucial. By tackling the highest-interest debts first, you can save a significant amount of money in the long run.
Consider Debt Consolidation or Balance Transfers
Consolidating debt into one payment allows you to combine multiple existing debts into a new debt with a single payment. There are two common consolidation tools that can lower the amount of interest you owe and help you pay off debt faster and more simply:
- Balance Transfer Credit Cards
- A balance transfer generally refers to when existing debt is transferred to a credit card.
- Balance transfer cards often come with a promotional 0% APR period, usually from 15 to 21 months.
- They are best for consolidating high-interest credit card debt that can be paid off in under two years.
- Many charge a balance transfer fee, typically 3% to 5% of the total amount transferred.
- Debt Consolidation Loans
- A debt consolidation loan is a loan taken out to pay down one or more of your other debts.
- You can use it to pay off multiple types of unsecured debts, including credit cards, medical bills, payday loans, and existing personal loans.
- Debt consolidation loans have a longer repayment period, usually from one to seven years, and many lenders offer high loan amounts.
- They charge 6% to 36% APR, depending on your credit profile, debt-to-income ratio, desired loan amount, and repayment term. Some lenders also charge an origination fee.
A Home Equity Line of Credit (HELOC) can also be an option for debt consolidation and accessing lower interest rates. By using the funds from a HELOC to pay off higher-interest debts, such as credit card balances, you can consolidate your debts into one loan with a potentially lower overall interest rate. However, you should exercise caution when tapping into your home equity and consult with a financial advisor to understand the risks and potential impact on your home ownership.
Consolidating can be an effective way to get a handle on your debt, but it won’t address spending habits that led to accumulating debt in the first place. Establishing a realistic budget and avoiding running up new balances on the credit cards you’ve paid off is crucial for long-term success.
Conclusion
In summary, effective expense tracking and budgeting are essential for maintaining financial stability and achieving your goals. By analyzing your income and expenses, categorizing your costs into needs, wants, and savings/debt, and following the 50/30/20 budgeting rule, you can gain control over your finances. Cutting unnecessary expenses, managing debt strategically, and exploring options like debt consolidation can further optimize your financial situation.
Ultimately, successful budgeting requires discipline, consistency, and a willingness to adapt as circumstances change. Regularly review your budget, adjust as needed, and celebrate your progress towards financial freedom. With diligence and commitment, you can master the art of budgeting and achieve lasting financial well-being.
