In my last article, I wrote about the power of the gap between income and expenses, and how important it is to hold on to that money instead of spending it simply because you have it. Increasing your gap is how you save money. The bigger your gap, the more freedom you have with your money and your time.
So, how do you go about increasing your own gap between income and expenses? Basic math will tell you that it boils down to two general options:
- Increase your income
- Decrease your expenses
For this article, lets focus on #2 – decreasing your expenses. And lets specifically focus on what I believe is a critical first step in decreasing your expenses: developing true awareness of how you are spending your money.
To develop awareness of where your money is going each month, you are going to need to keep track of your spending. Now, let’s go ahead and address the thought many of you might be having right now: Yes, this might be scary for some of you. Yes, it might feel difficult. It is so easy for us to justify all of the little daily expenses in life, but sitting down and adding them all up and facing the music of the raw numbers – ouch. Sorry friends, there is no way to sugar coat this. If you are someone who tends to spend money without paying attention, then this may be a tough exercise for you. But if the idea of this exercise scares you – then honestly you are the exact person the exercise will really benefit.
Stepping out of your comfort zone and trying new things really is the best way to grow.
Even if it does feel scary, you need to know where the money you earn is going each month. Every dollar. Tracking expenditures (especially every dollar) can be tedious and feel boring to some people (is it weird that I actually enjoy it?) – but it is a critical first step.
Think about it: You cannot fix a problem until you understand the problem and are aware of what is causing it. You cannot respond to an emergency until you have assessed the situation surrounding the emergency. Have you ever been trained in CPR? In CPR training, we are taught that the first step of emergency response is to “assess the scene.” How could you adequately respond otherwise?
Well, think of this as the same thing. You cannot respond to the “emergency” of your finances until you have “assessed the scene” of your financial situation.
Are you convinced? Good, now let’s get back to that critical first step: you are going to track your expenses for one month.
How to Track Your Expenses
There are some great apps out there that can help you with this task. Mint.com, personalcapital.com, and youneedabudget.com are a few of the more popular sites but there are so many out there. All three allow you to connect your bank accounts and credit cards to their site and they pull in your transactions and allow you to categorize and monitor all of your spending. Some people prefer to use an excel spreadsheet or good old fashioned pen and paper. You can use what feels good to you but I like to encourage the electronic method because while it does take some effort to set it up, it will end up taking you much less effort throughout the month. We all know that life can get busy and hectic so having things automated can help us stay on track.
Whichever method you choose, you must commit to keeping track of every expenditure, of every dollar. And you must commit to being honest with yourself. At this point, the only thing you need to focus on is keeping track of your spending, you don’t need to change your spending habits or try to avoid buying what you usually buy. Just be your normal spending self for this month (just make sure it is a version of your normal spending self who is tracking that normal spending).
7 Steps to Tracking Spending
Step 1. Choose an app/website that you want to use and will commit to using. I use Mint.com because I like that it allows me to track and split transactions, make charts and graphs, compare spending by months, and keep track of all of our investments.
Step 2. Take 20-30 minutes of your time and commit to getting the app set up for you. You will need all your credit card and bank account login information for the account set up. You will also want to take another 45 minutes of your time to familiarize yourself with the app/website. All of the apps have training videos and articles that are really helpful if you take time to read them. Think of this time as an investment and tell yourself that you will eventually get paid well for the time you are spending now.
Step 3. Go about life as normal and spend on the things that you usually spend on. If you use credit or debit cards, your expenses will automatically connect to your account. If you use cash, then you will need to make note of what you spent the cash on and how much you spent. Cash can be a helpful budgeting tool, but for this exercise, I like to use a card so that everything shows up automatically on my Mint.com account.
Step 4. After 3-5 days, you need to go into your website/app and review and categorize your spending. Most apps will automatically categorize transactions based on internet data, so you might be tempted to say “hey – it is already categorized for me” and go about your day. However, you need to make sure your transactions are categorized appropriately. For example, most gas stations will automatically show up as “gas/fuel” in my Mint account, so that one is easy. Things like a Target trips can get trickier and take a little bit of extra effort to categorize. Say at Target you spent $100. Mint.com might call this “groceries” or “shopping”. Let’s say that $100 was broken down like this:
$25 clothing for your child
$25 a birthday gift for your child’s friend
In that case you don’t want it all in one category. You will want to click on the Target transaction and click on the “split” button so that you can break the $100 into the appropriate categories. Maybe you will call the three categories “groceries”, “kids clothing”, and “gifts” – you get to decide what to call your categories and how you organize them. Make sure to include specific categories in areas that you tend to spend money on. I do not recommend a general “shopping” category – that is simply too broad. Instead make categories for different types of shopping. Things like “work clothes,” “jewelry,” “kids clothing,” “personal care,” and/or “bike parts and maintenance.” Again, you create what works for you.
Step 5. For this month, I recommend that you go in and categorize your transactions two times per week. If you wait too long the task can feel overwhelming and overwhelm causes us to give up – don’t give up! Once you are good at categorizing you can do it much less frequently. I currently do it twice a month.
I want to be clear from the beginning: this will take time! You need to commit to yourself that you are going to spend time on this exercise twice each week. Think about how much time you spend each week earning your money. 40 hours? 50? 60? Now, how much time do you currently spend making sure that the money you earn is working for you? 15 minutes? More? Less? If you spend this consistent time each week taking care of your financial life, I can promise you that you will save hundreds if not thousands (or tens of thousands) more dollars than you would otherwise. Make a commitment and stick to it!
“Awareness is the greatest agent for change.” Eckhart Tolle
Step 6. At the end of the month you are going to look back at all your expenditures. Hopefully they are already categorized by this time, so you can spend the time really looking at the numbers.
I want you to take a hard and honest look at the things you are currently spending money on in each category. How much do you spend each month on things like:
- Dining out
- Shopping for clothing
- Personal care items
- Home maintenance
Look at the numbers for each category and start to do a little soul searching and reflection. This is not a time to judge yourself or be critical, just an opportunity to look at your past spending habits and start noticing the thoughts that come up for you as you investigate the numbers.
Does the amount of money you spent in any of the categories surprise you? Are there any areas you feel great about? Any areas that upset you?
For most people, what happens here is somewhat magical. Before doing an exercise like this, we think that decreasing our spending is going to feel like deprivation. None of us want to feel deprived so we just don’t try. But here is the magic:
With awareness of our spending habits comes an automatic decrease in spending that feels absolutely nothing like deprivation.
Most people do this exercise and find hundreds of dollars per month that they are spending frivolously. And by frivolous – I mean they are not getting any value, any joy, any happiness from those expenditures. They just spend out of habit, out of boredom, or as an attempt to feel good or avoid negative emotion. And while spending the money on frivolous things might have felt good in the moment, it does not actually lead to happier, more content and joy-filled lives.
Is it worth it to you to continue spending on things that do not truly bring joy and happiness to your life? Might it be worth it to bring some mindfulness to your spending habits and see what happens?
I know you are feeling hesitant to get started and I know all of your reasons and excuses because I have used every single one of them! I encourage you to give this exercise a try. Give yourself this time, make the effort, and take a step towards increasing your Gap between income and expenses.