I struggled with debt for years. I couldn't get a handle on where my money went. I made a decent wage, but I was always broke! Where did I spend it all? Then I read Your Money or Your Life and heeded the book's advice to “keep track of every cent that comes into or goes out of your life”. The results were startling.
What does it mean to keep track of every penny you earn? Your Money or Your Life recommends that you keep a Daily Money Log. This log can take any form.
- a pocket-sized memo book
- an index card (or the hipster PDA)
- an actual PDA
- an appointment book
- a computer text file
- a checkbook register
- personal finance software
- a spreadsheet
The most important thing is to use the log. Every time you get money — whether it's from a paycheck or a garage sale or picking up change from the ground — write it down. Every time you spend money — whether it's paying bills or buying coffee or paying bus fare — write it down. Keep track of every penny that enters or leaves your life.
Tracking your spending helps to demystify money — you begin to perceive it as a tool. You gain a sense of power — you no longer feel that money controls you, but that you control money. Your awareness of your money habits is sharpened, allowing you to make changes to improve your situation. This is an essential money skill, and it's easy. Try this for two weeks and you'll find that it becomes second nature.
When you track your spending, it's important not to make judgments. This activity is meant to describe your money habits, not to change them. (You do want to change them, of course, but that's a separate task.)
Here are some things I've learned over the past few years of tracking my own spending:
- Be careful with transactions that are easy to forget. Some transactions — cash transactions, online transactions, transactions without a receipt — are quickly forgotten. Take special steps to remember these, such as…
- Get a receipt for everything. It's easy to forget were you spent your money on just 24 hours later. Make a habit of putting all your receipts in one place so that you know where to find them.
- It's best to process your transactions daily. I find this hard to do. I process my transactions weekly. If I go longer than this, something invariably gums up the works: I can't remember a transaction, can't find a receipt, etc.
- Make it a routine. If you get in the habit of tracking your spending, it becomes second nature.
- As always, do what works for you. No one system is perfect for everybody. The important thing is to track your spending. How you do this is up to you.
Here's what works for me:
- I try to get a receipt for every transaction. If one is unavailable, I jot a note to myself as soon as I can.
- I tuck these receipts (and scribbled notes) into my wallet. My wallet essentially serves as my Daily Money Log.
- At least once a week, I take my wad of receipts and enter the transactions into Quicken.
This process paints a picture of your spending habits as they actually exist, not as you think they exist. You can use this information to create a budget. Or, at the very least, to serve as snapshot of where your money goes. Without this method, it's difficult to know exactly how much you really spend on thneeds or zizzer-zoof seeds.