Welcome to Q & A Wednesday on Millionaire Habits, where I answer one of your weekly questions for everyone’s benefit.
💡 Question: “Steve, how do I know if I’m spending too much money? I never thought I was, but I’m not sure.”
Had a discussion the other day with a subscriber that went something like this:
“Steve, I’m making good money but never have enough to invest.”
Me: “Okay, how much are you making?”
“Around $100,000 a year.”
Me: “Legit. Okay, are you overspending?”
“No! We live a normal life, and there’s no way we’re overspending.”
Me: “How do you know?”
…silence.
I’ll be straight with you: This part of personal finance sucks. It’s never easy or fun to think about whether you’re overspending.
But here’s the kicker: If you don’t know how much you’re spending, achieving financial independence will be 100x harder.
I don’t care how much money you make. It doesn’t matter. If you’re not tracking, you’re not serious.
Luckily, tracking your spending is not nearly as difficult as it sounds.
Here is how to make it easy.
How to Make Money Tracking Easy
This email is going to make you pretty damn happy. Tracking your spending sounds difficult, but it doesn’t have to be. My wife and I track everything we spend and only takes about 10 minutes of effort a month now.
First, what’s the point of tracking? Imagine this.
Why tracking is important
In four months, you’re taking a vacation to Mexico. And naturally, you want to look your best for the beach. You might have a little extra…packaging around your midsection and want to lose, say, 20 pounds. What’s your first step?
Eat less? Work out more? Which one, and how do you know?
The answer is simple: You track your calories. Run a 600-calorie deficit for the next four months, and you’ll easily lose 20 pounds. Maybe more.
Here’s the rub: You’ll never know how many calories that amount to if you don’t know how many calories you’re currently eating, will you?
Thus, tracking your current calorie intake is step one. Cutting calories (and tracking them!) is step two. Losing weight is a byproduct of those steps.
Tracking your money works exactly the same way. If you’re not tracking, you’re running in the dark…and eventually, you will hit something sharp!
Here are four steps to make tracking your expenses EASY.
1: Use automated tools. Many computer tools exist that will let you connect all your bank and credit cards together into a single, easy-to-use dashboard. The tool will review your expenses from all your accounts and categorize them for you (you can override these category choices if needed). Automation is literally the key to making personal finance easy.
Tools I like, Fina, You Need A Budget, and PocketGuard.
Note: If you prefer to do this step manually, you can. Create a spreadsheet with budget categories like Food, Restaurants, Clothing, Gas, etc. This will require going through your bank and credit card statements and categorizing each expense into their respective categories. Also, keep your receipts.
Having the categories is crucial. It’s how we will make better decisions later.
2: Total up all expense categories. Again, automated tools will do this for you, but if you’re doing all this tracking by hand, total up each expense category so you have a total monthly spending amount.
This is when everything begins to get real.
Take a look at those totals…notice anything that surprises you? If you’re like most people, you probably will.
“Whoa, I’m spending $500 on gas last month?!?“
“Crap, restaurants are costing me almost a grand each month!“
This step is important because it’s impossible to make better choices with our money if we don’t know where it’s going to begin with. If you skip this step, you might as well just stop here. The rest won’t do you any good.
3: Dial back overspending. If you discover you’re spending more than you reasonably should in certain categories, dial it back.
That’s a two-step process.
Step 1: Set spending limits for each category (and stick to them!). For instance, you can only spend $250 on clothes each month. Or maybe $400 on restaurants. Each category, regardless of whether or not you think you’re spending too much, should have a self-imposed spending limit.
Step 2: Track it like the dickens.
A great way to do that is to (once again!) use an automated tool to track your spending in real time. Check it regularly (at least a couple of times a week). To make tracking even easier, many tools will allow you to set up alerts if you’re approaching your spending limit. For instance, you might want an alert when you’ve spent 80% of your limit in any category. Maybe another at 100%.
4: Use credit or debit as much as possible. Credit and debit cards make it easy to track every dollar you spend through automated apps or your monthly statements. Cash, on the other hand, is much more difficult to track.
The key to making credit cards work for you is paying them off monthly, no exceptions. If you can’t trust yourself to do that, use a debit card instead.
Note: If you prefer a cash-based approach, you can allocate a specific amount of cash to different spending categories. Place the cash in envelopes labeled with the category names. Once the envelope is empty, you know you’ve reached your spending limit for that category.
Before I leave you…
This might sound like a lot. And if you haven’t tracked your money before then it probably is. But I can assure you the most difficult part of this process is the very beginning. Once you get into the swing of things, it becomes very easy.
And if you’re okay using automated tools to track your spending automatically, you’re literally on Easy Street.
Chat next week,
– Steve
P.S.: Curious about whether this person was overspending? He was. He was overspending on restaurants and car parts (he’s a car guy) and didn’t realize it until he began tracking every dollar. While individual expenses can seem small, they add up over the course of a month.
