Earlier I discussed the importance of spending less than you earn and how this is the number 1 rule of personal finance management. But how can you work out whether you spend less than you earn? By tracking your expenses.
Now, I know tracking sounds pretty dull and boring but it provides you with essential information to start your path to better personal finance management. If you don’t know what’s leaving your account every month you may find that your loan will not cover you for the entirety of a term.
How can you track?
1) use pen & paper (preferably a notebook so it doesn’t get lost)
2) Mint software (electronic budgeting software which is free)
3) Notepad on mobile
4) Diary
5) Use a debit card/credit card and monitor your bank statements
I’ve tried all of these methods and found that Method (1) is the simplest and easiest. Through 5 years of tracking this method has provided me with useful information on my spending habits and also alerted me to possible problem areas of spending.
At first I just wrote down everything I spent but then I used different categories to give me an idea of where I spend.
I use the following categories for both my essential and discretionary spending:
Rent
Food
Gas & electricity
Water
Internet
Transport (Flights)
Transport (Buses/Taxis/Trains)
Mobile
Drinks (non-alcoholic)
Alcohol
Eating Out
Going Out/Hobbies/Membership
Clothes
Haircare/toiletries
Presents
Make up/Jewellery
Other
How is tracking effective? Apart from the obvious reasons that tracking enables you to see how much you spend each month, tracking is really good at keeping your expenses in mind. As I mentioned in the past, it is clear that tracking constantly makes you assess what you’re spending on. The very act of tracking forces you to look at your spending critically.
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