Having your debit or credit card refused at the cashier is embarrassing. The public rejection is humiliating. As you slink past the people in line, their judging eyes say it all: You are not in control of your money!
But the self-rapprochement for having lazy money habits stings the most. Do you know how much you spent in coffee shops, on lottery tickets, or for movie tickets in 2018? If your answer is no, this could explain why you are now facing a cash shortage.
Where did the money go? With an income and expense tracking system, you will never have to ask that question again. Expense trackers itemize and tally your income and expenses, and tell you how much you have left over to spend, save and invest.
If you have a hard time keeping tabs on where your money goes, tracking expenses is a way of tracking your spending and saving habits, and the first step towards changing them.
- Keep Track of All Your Receipts – If you have a drawer overflowing with receipts, then you need an expense tracking system. Organize your expense receipts in a filing system or shoe box, or scan an image of all your receipts with a smartphone app. If you scan receipts, keep the original as a backup.
Weekly or monthly, sort the receipts into household expense categories. Major expense categories include: groceries, utilities, automobile expenses, medical and dental, entertainment, sports and leisure, and so on. Expenses can be tracked with a paper ledger, spreadsheet or smartphone app.
- Post to a Paper Ledger – Some of the richest people in the world keep money management simple, and still use a reliable pencil and paper ledger to manually record income and expenses. This is basically your checkbook system – deposits (income) on one side and withdrawals (expenses) on the other side. The difference between your income and expenses is the amount left over for savings and investment.
Income includes two categories- principal income and passive income. Your principal income is your salary and any bonuses, commissions or tips you may receive. Passive income includes dividends, interest, and rental income. If you are a writer, you may receive passive blog revenue from Google Adsense or royalties on a book.
Expenses are listed by household category (rent, groceries, utilities, etc.). When identifying areas to reduce expenses and save money, it is important to differentiate between expenses you can and cannot control.
Fixed expenses are typically paid by the same due date monthly. They include the rent, mortgage payment, car loan payment, and insurance. But the amount and frequency may change for expenses such as utility bills, food, and gas.
Pocket expenses are taken from the discretionary income remaining after all your necessary expenses are paid. They cover non-essential expenses, including vacations, yoga classes, coffee breaks and lottery tickets.
- Reduce debt with Envelope Budgeting
Budgeting was a lot easier in Ancient Rome when if you did not have the coins to spend you could not overspend. Today, the average American household debt is more than double the average annual income of around $60,000.
The envelope system keeps you out of debt by containing expenses within your available monthly income limit, after tax and other deductions have been made. This is your disposable income you can spend or save. Allocate that cash across your envelopes by expense category.
|Monthly Income $2,000|
But what if your friend offers to sell you two $110 tickets for the Red Sox baseball game and your Entertainment envelope only has $200? Surpluses are carried over each month. Check to see if you have a surplus in another category that you can transfer from. For example, you can move a $20 surplus from Utilities into Entertainment, but you cannot overextend your total budget like you can with a credit card. In this way, the envelope system helps you live within your income means.
More practicably, you could use play money or tokens in place of placing cash in the envelopes, and then charge your expenses on your debit card.
- Simplify Expenses with Spreadsheet Templates
Spreadsheets are the digital version of the paper ledger. They simplify the organization and calculation of expenses by automatically performing calculations and recalculating sums when values change. You can compare changes in expenses over time with charts and graphs.
Budget scenarios are easy and quick to run on the spreadsheet. Suppose you want to cut down on your pocket expenses, so you decide to become a teetotaler and quit caffeine. Annual expenses by category and across time periods (weekly, monthly, annually) are automatically tallied. The column for annual coffee expenses reveals that the $5 a day spent on coffee adds up to $1,200 a year. That covers the price of the new iPad Pro you want to buy!
Both Microsoft Office Excel and Google Sheets offer a wide range of ready-to-use budgeting templates. Categories can easily be added for new household expenses, such as a new baby or home remodeling project. Spreadsheets sync with popular expense apps, such as Mint and Expensify.
- Save With Smart Budgeting Apps
Basic budgeting apps start with digital versions of the envelope budgeting system, such as SimpleBudget. App features may include the ability to scan photos of receipts and set reminders for bill due dates.
A popular feature offered by Mvelopes and GoodBudget is the ability to connect your virtual envelopes to your bank accounts. If you want some budgeting advice, Mvelopes premium version offers coaching. PocketGuard and Pennies act like virtual financial advisors assessing your income, expenses and savings goals and telling you how much you can spend each day.
If you seek more guidance, meet Penny. Penny replaces the app dashboard with a virtual assistant. Penny instant messages you when you have an upcoming bill payment, and sends graphs showing changes in your spending habits. Not all apps are free, while many offer free trials.
The best way to ensure you stick to your new spending habits is to align them with your goals. When forming new habits, we are more likely to change our behavior when we are goal oriented. Start your budgeting with a list of the estimated cost of the vacation you want to take, car you want to buy, and other items on your wish list. Some apps will even divert extra change to your savings account and tell you how close you are to buying your new iPad. Following a spending and savings budget is not only easy but also rewarding.