At work lately I’ve been spending more time researching publicly traded companies. This involves reviewing reports that the business is required to put together each quarter and year to help communicate to shareholders where they are at financially. Is there any reason a business should track their finances? In this post I’ll detail out why tracking expenses is so important.
My home is like a small business
I’ve been tracking my expenses since january of 2014. Its an old hat by now but gives me a sense of control that I know where each of my hard earned dollars is going.
I continue to treat my personal finances more and more like a small business. In that sense I’m both the CEO and the shareholder. I figured if the shareholders of a public company want to know the detailed finances, why shouldn’t I as the leader of a household.
1: Tracking expenses creates financial awareness
I’ve come to be known by my friends and family a personal finance geek. Frankly I’m ok with it. With this reputation comes lots of questions by everyone on the whys and hows of different parts of your finances. I’ve even had the privilege of helping out a few couples that want to get their financial house in order.
The first thing I ask them? What do you spend your money on?
I’ve never met a couple that wanted to talk finances that knew where their money was going, and thats ok. However, thats always a great place to start.
Oftentimes the basis for a good personal finance plan isn’t complex and doesn’t even involve complicated math or sophisticated degrees. Its merely being aware of where your money goes.
2: Tracking expenses helps identify spending issues
If the one takeaway you have from this post it should be to make sure you are tracking your expenses. When you do start tracking them I can about guarantee its going to be an eye opener.
Those first few months are going to leave you scratching your head with questions like: have we always went out to eat this much? What did we even buy at Target?
Don’t worry. I ask myself similar questions, mostly about Target and Costco though.
I’ve seen couples that change their spending habits after just two weeks of tracking their spending. One couple saw how much they were spending on eating out and put an end to it.
A favorite quote of mine is:
What gets managed gets measured – Peter Drucker
I think that applies perfectly to this situation. You can’t manage your finances until you have something to manage.
3: Tracking expenses ensures your spending is aligned with your priorities
Let me be clear, there is nothing wrong with spending money. I plan on taking my family to Disney later this year. That won’t be cheap but I am ok with investing in my family so we can make great memories together.
On the other hand my TV is 8 years old and my wife always bugs me about getting a new one. Having a new TV doesn’t align with my priorities so I don’t really want to get a new one until our current one breaks.
If you want to spend $400 per month going out to eat every month, by all means, do it! If you are aware you are doing it and continue doing so, I dont have any issue with it.
The instances where its happening but no one is aware, those are the times when I think it needs to be thought through a little more.
4: Tracking expenses may reveal you are living a life you can’t afford
If it seems that the debt keeps piling on more and more each month, you may be spending more than you make. Guess what?
Thats ok! Now is the time to take control of the situation by tracking expenses, putting in the work and putting a plan together.
Given that the US is such a consumer society its more common than you might think. You know the saying “You are the average of the 5 people you spend your time with”? That applies to your finances too.
If you live in a fancy neighborhood and try and keep up with your neighbors on car brands, clothes brands and vacation spots it may be hard to keep up.
Again, I’ve seen it before. If this is you, its ok! Tracking your expenses will help you become aware and start righting the ship.
5: Tracking expenses will help you know your annual expenses
I would venture a guess that 80+% of people could you tell how much they make each year. I’ll be the first to tell you this isn’t a bad things.
Knowing whats coming in the door is an important piece to the personal finance puzzle. It also turns out that its unbelievably easy to track. How?
It either requires looking at your paycheck or looking at the W-2 your employer hands you each year.
You know whats not easy to track? Your expenses.
The foundation of any successful personal finance plan focuses on one thing: the gap between your income and your expenses.
If you know your income you are off to a great start! However, if you don’t know your expenses you are missing half the puzzle!
The reason people don’t know their expenses like they know their income? For one it isn’t easy. Two, its not sexy!
I mean could you imagine someone going around saying “I spent 10k last year eating out!”
Tracking expenses is important
I hope I’ve convinced you! Tracking expenses is a key to financial success. In future posts I’ll cover other basics of budgeting and how to minimize the time it takes you to track expenses.
Creating the awareness is the most important thing. From there you can understand if you are spending too much on any specific category or too much in general.
Until you do it you’ll never know!