Tracking every expense each month is overrated!
The first thing you must do is pay yourself. Also, know your expenses and pay off your bills each month. The important thing is to know yourself and find out what works for you. I will give you step-by-step directions on how we keep track of our spending.
“Spend extravagantly on the things you love, and cut costs mercilessly on the things you don’t.”
― Ramit Sethi, I Will Teach You To Be Rich
Add Up Your Expenses
Create three columns, then list out your expenses. First will be your yearly expenses such as home insurance, license plate registrations, filling your propane tank, vehicle repairs, and summer vacations. Don’t forget to budget Christmas and birthday gifts in this column as well. I am sure I missed a few of your expenses. Additionally, think thru the last year and write down the surprise expenses that came up since you didn’t pay them monthly.
The second column will be the monthly expenses that are set. Each month, you know how much your rent or mortgage will cost, your internet, and your car insurance. Also, your electricity and natural gas will fall into this category. Make sure that you overestimate these two expenses. Also, remember the summer and winter months will be more extreme.
Your last column will be for your monthly variable expenses. For example, your grocery, entertainment, and gas for your vehicle. These expenses are adjustable, and you can spend less if you need to on these.
Track Your Expenses
Track three months’ worth of your expenses, know what your average monthly spending is in each category, and make sure you didn’t miss any. This should be completed after the first step to compare what you thought you were spending to what you actually are spending. Then, look for areas to cut your expenses and make them closer to what you thought they were.
Total Your Expenses
The next step is to do the math, add up your yearly column, and divide it by 12. Next, add up your monthly column as well as your variable column. Figure out how much your monthly income is. If you have extra money left over, that is awesome. If you do not, then you need to find ways of cutting some of your expenses.
Set Aside Your Savings
Pay Yourself First! Even if it doesn’t feel like you have extra money after doing step 3, you need to find a way of saving for retirement and an emergency fund. Your retirement goal should be at least 15% of your income. You don’t need to start at 15%. However, invest as much as you can and take advantage of your company match. If you don’t invest 15%, then increase 1/2 of your pay raise when you get one.
Your emergency fund should be 3-6 months’ worth of living expenses. Notice I said living expenses, not wages. Also, keep in mind if you lost your job, it would be possible to cut a few of your expenses. Choose an emergency fund number that will allow you to sleep at night.
Create Your Online Bank Accounts
Set up three online saving accounts and one checking account. I use Capital One 360, and their interest rates are often near the highest available. I have been using them for over 15 years. Set up your direct deposit into the checking account and then set up auto transfers to the other 3. Every payday, automatically withdraw the money that goes into your emergency fund, yearly expenses, and fixed monthly expenses into the correct savings account. https://www.capitalone.com/
Automation Complete
Congratulations, you have now set up your budget. You know how much you have to spend by what is left in your checking account. You don’t need to track all your expenses each month, just the few that are variable. Each month when you pay your bills, take out the money from the correct savings account, and transfer it back into the checking account. Then pay your bills from there. Make sure you don’t do more than 6 transfers from your savings account in a month. If you do that multiple times, they will close your account. Add up each expense and transfer them over together.
Could we do a better job of saving money if we tracked each purchase, watching and tracking every dollar? Absolutely! Would I enjoy doing this? Absolutely not! The key to us feeling ok with this is that we pay ourselves first. We make sure that our savings and key living expenses are covered. Anything leftover can be spent. If you do this correctly, you should feel expenses are close each month. Always push yourselves to save more.