Tracking your spending can help you manage your money well and make progress towards your goals. When you know where each dollar is going, you're more empowered to make changes to your cash flow. You'll also have a good understanding of how much you're able to save toward new financial goals.
Tracking your spending is a simple enough money move, but the results can be far-reaching. Being consistent about tracking your expenses over time can help you avoid debt, nail your goals and more. Here are five reasons to track your spending.
1. Stick With Your Budget
One of the biggest reasons to track your spending is that it can help you stick to your budget. When you set up a budget, you create targets for how much you think your expenses will tally up to, plus how much money you want to spend in various categories. But if you don't have a system for knowing how much you're actually spending versus what you'd planned, it's easy to blow your budget.
Using a budgeting app, a spreadsheet or an old school pen and paper approach to track your spending allows you to make real-time decisions and cut back if you're overspending in a certain area. So, if you go over on grocery spending in a given week, for instance, you can pull money from another category, such as dining out or shopping. Being able to course correct in real time helps you keep your cash flow positive.
2. Spot Ways to Cut Back
Not only does tracking your spending help you pivot to stop overspending in the moment, but it gives you overarching insight on where your money goes. In particular, you can use this information to tweak your discretionary spending. For example, maybe you realize you're spending more of your income than you'd like on ordering takeout. You can build new frugal habits, like cooking dinner each night or meal prepping on the weekends, to support yourself in cutting back in this area. It all starts with becoming more conscious of your spending patterns.
3. Avoid Debt
Actively monitoring how much you're spending throughout the week and month can help you avoid debt. By spending less than you earn, you can avoid using credit cards to cover the difference. When you do use credit cards, you can track your purchases to ensure you're spending within your means. Then, you can pay off your balance before the end of the grace period to avoid paying interest.
Or, if you currently carry balances, tracking your spending can help you free up funds to pay off your debts faster. By being aware of your expenses, sticking to a budget and finding new ways to cut back, you'll have the opportunity to free up more funds and allocate them toward debt repayment. In turn, you'll save even more money on interest by paying off your credit card debt and loans in less time.
4. Reach New Goals
You can use a spending log to make it easier to set and hit new savings goals. When you know where your money goes, you have a reliable idea of how much money you tend to have leftover after paying for expenses and discretionary spending each month. That can help you create a realistic plan for how much money you want to save toward a given goal each week, month or paycheck.
For example, you could set a goal to build a flush emergency fund, save for a down payment on a house or create a travel and vacation sinking fund. Then, you can set up automatic transfers into your savings account. By planning ahead for large expenses and building emergency savings, you can build up your financial resilience and remain stable when emergency expenses come your way.
5. Plan for Taxes
Tracking your expenses throughout the year can make tax season a little easier. The more organized you are, the easier it will be to file on time and the faster you can receive your tax refund, if you're owed one.
For example, the child and dependent care credit and American opportunity tax credit are commonly claimed credits that require you to have qualified expenses to claim them. Also, if you work as a freelancer, have a side gig or own a small business, it's all the more critical to track exactly what you're spending money on. You can deduct certain expenses related to your business from your self-employment income, so tracking your spending and keeping good records is essential if you work in the gig economy.
The Bottom Line
Tracking your spending can help you bridge the gap between your budget goals and your actual spending. Staying aware of your finances, spending less than you earn, avoiding debt and building savings are all key money habits that can help you build up financial stability and grow wealth over time.
In addition to tracking your spending, you can track your credit for free through Experian. Staying in the know about your credit report and score can help you understand what types of credit and loans you may be able to qualify for. You'll also get personalized insights into ways you can improve your score.
