Money Tool of the Month: Tracking Income and Expenses

Key to any effort to change your habits with money is gaining clarity about what you have and where it’s going, how much is being spent on necessities, on discretionary items, and to support debt. Gaining clarity requires tracking all income and expenses, every day, to the penny, for at least 30 days.

Many people trying to change self-defeating money habits find that tracking becomes a bottom-line behavior; if they stop tracking for even a few days or a week, the “money fog” rolls in and old habits of overspending or underearning return. Those people must track all income and expenses every day for life; only you can determine how true this is for you, by giving it a try.

The 4 steps of tracking:

Checkbook: Do use a checkbook register to track all deposits to and withdrawals from your checkbook, and keep a running balance so you’ll always know exactly how much money you have in your account. Be sure to include any automatic deposits or electronic payments; also include all checks, of course, as well as ATM withdrawals or point of sale withdrawals made with a debit card. This may seem a fairly basic discipline, but even those who have done this in the past may have gotten away from the habit due to on-line banking and reliance on overdraft protection.

Cash: Do you make multiple trips to the ATM each week and wonder where all that cash is going? Get a small notebook or an extra checkbook register and record all cash transactions made each and every day, as you spend throughout the day. Record not only the amount but also what was purchased so you’ll know where your cash is going. And don’t forget to record cash you receive, either from the ATM or from others – maybe friends repaying you for the loan you made them for lunch the day before, or cash gifts in birthday cards from family.

Debt: Set up a separate sheet of paper to list all of your non-secured debt, usually all debt except mortgages or car loans. List the person or company to whom the debt is owed, the current interest rate, the minimum required monthly payment, and the current outstanding balance. Once all the debt is listed, take a deep breath and total up the minimum monthly payments and the outstanding debt. It may be painful to see the total, but at least now you know and are armed with the information you need to begin to address your debt.

Use this sheet to track monthly payments, the total of any new monthly charges, and the new balance, for each account and then in total for all your debt. If you haven’t already made the commitment to yourself to stop incurring new debt on these accounts or with new accounts, then this exercise in tracking your debt will soon motivate you to make this commitment.

Pulling it all together: Create or buy a monthly spreadsheet (excel or paper) that has space for detailed categories of expenses and income, and spaces for daily entries in each category. Then use this spreadsheet to record all income and payments made during the month. Include all payments made by check, point of sale (ATM or debit card), and cash. Do not include transfers between your checking account and your purse or wallet, that is, cash ATM withdrawals or cash deposits; the purchases you make with the withdrawn cash will be counted when the cash is spent, and the cash coming in should be counted in your cash record as income, not counted again when it is deposited to your checking account.

If you’re still incurring new debt by using credit cards, enter these purchases as well, but circle the entries, so you’ll know that the money wasn’t actually spent this month. Doing this will identify how much of next month’s (or worse, next year’s) income you’ve already used to meet this month’s expenses.

Record income and expenses on this summary spreadsheet daily, if at all possible, for two reasons: you’ll be more aware of spending day by day as you go through the month, and you’ll be more likely to stick with the tracking – waiting a few days, or especially a week or more, to post transactions, creates the sense of an overwhelming task, even if it will actually take only 30 minutes or so to get caught up.

At the end of the month, run a total by category and totals for all expenses and income, and you’ll be crystal clear on where your money is coming from, where it’s going and the relationship between the two. If you’ve never tracked in detail before, or it’s been a few years, I guarantee you’ll learn some surprising things.

Knowledge is power – it empowers you to make decisions to do things differently; to decide to cut spending in some areas, spend more in others (such as taking care of your health), or to stop using credit cards and start spending on a cash basis. You’ll get clear on whether your income is sufficient for your quality of life, and if not, this may be the impetus for finding ways to earn more. Tracking gives you the information you need to finally begin saving for your dreams.

Find it overwhelming to think of all this tracking of every money transaction? Be aware that it’s not unusual for those resistant to blowing away the money fog (which allows them to continue with old behaviors, unclear of the consequences) to use the effort involved with tracking to keep them from even giving it a try. Once you have a system that works for you, it needn’t take much time, maybe 10 minutes per day and an hour or two once or twice a month to run totals and balance your checkbook. Isn’t your money worth your time? How much time and effort is it worth to achieve financial peace of mind?

By Kim Corwin, CFRC, AFC, founder of New Leaf Financial Counseling.