Why Tracking Spending is Important
Potentially one of the biggest moments of change in our personal finance life is when school ends and we enter into the job market. This may be after high school, community college, university, graduate school, or post graduate school, but this new phase of life will almost always contain a sudden change in income.
Whether you are earning $100k a year in your new job in tech, or $40k a year as a teacher, this will be significantly more money than you were earning previously and with it comes a change in lifestyle. In school most of us did not have much money, if any, and that which we did earn through part-time jobs was maybe enough to cover rent, utilities, or food with slightly better nutrition value than Top Ramen. As soon as we get our initial paycheck from our new job we immediately try to separate ourselves from the previous lifestyle and convince ourselves that we deserve better, and while this may feel good in the moment, it can be one of the worst financial mistakes that we may ever make. Instead of upgrading our spending style dramatically after graduating, this is the absolute best time to build good financial habits that can significantly improve the quality of our lives.
How to Start Tracking Spending
While school is wrapping up, I think the most beneficial activity we can partake in is to begin tracking our spending. Contrary to popular belief, this budget SHOULD NOT be constricting. Tracking should be a tool to give us insight into how much money we spend on a given day, week, month or year and what items/activities we tend to spend this money on. I currently use and would strongly recommend the app Mint being that it is easy to use and free of charge, although there are many others ways to track spending. Setting up a Mint account may take an hour if there are a couple bank and investment accounts that need to be linked. If you need motivation, pay yourself $100/hr. to get started with creating this tracking system, (ie provide yourself with $100 or another appropriate amount in fun money for completing the task). Once you have your account set up information will be continuously pulled so you will not need to balance your checkbook every month, log into every credit card application to make sure you have paid them all off on-time, or check to make sure all your direct deposit checks went through and were correct.
If you are not interested in utilizing Mint to tracking spending, Personal Capital will work, or you can go more simplistically and use an excel sheet or paper ledger. While using an application does bring with it a minor amount of risk, the apps will update continuously and automatically so tracking spending will require minimal upkeep. Another option provided by the personal finance blogging couple Waffles On Wednesdays is to create your own spending tracker that will not require linking accounts and can be transferred to a cell phone for easy tracking on the go. Here is a link on their post for the step-by-step guide to create this tracker in 30 minutes or less.
Personally, 3 months after graduating, my truck (which was older than I was and had over 225k miles on it) broke down and I convinced myself that I needed a car. I justified this by saying to myself “Of course I have to get to work every day.” From a young age my parents have always had very good financial sense and had drilled into me the idea that buying a new car is typically horrible financial decision due to depreciation and so I did my research and purchased a three year old sedan for around $20k. While this saved me from those first two years of depreciation, I wish I had understood that I was not just purchasing a vehicle that I would need to take a portion of every pay check to pay off for the next couple of years, I was also facing lifestyle inflation. Having a nicer car built up an image in my mind that with a nice car, I needed to live in a nicer neighborhood so my car wouldn’t be targeted, and I should also have nicer clothes to dress like I can afford the vehicle, and that I deserve these things because I can pay for these things (or at least the monthly payments) because I now have this new job.
Breaking out the math, I had $10,000 in my bank account for a vehicle I knew I wanted. Let’s calculate what the outcome would have been if I had bought a vehicle for $5,000 and invested the remaining $5,000. I would not have taken out the $10,000 car loan and put those $300/mo payments towards investing for the next 36 months and the additional lifestyle increase of $200/mo that was directly related with my new vehicle. While this was well below my pay checks from my new job, if I had invested this at $500/mo. for the 36 months starting when I get my loan in fall of 2016, I would have added an additional $21,000 to my net worth.
Tracking Spending Take-Aways
Most of us will enter this cycle and it will appear gradual, monthly payments add up. When we move into a nicer house or apartment we believe it should be furnished better and it is not uncommon to take out payment plans on a new sofa, a nice large TV to fill that wall that is a little too big, or a Purple mattress that will get delivered too your door and magically solve all our sleeping problems. We are living in a consumer society that believes if we aren’t improving our surrounding things, we are not improving ourselves and it is easy to not see how large that increase in spending can be.
Simply knowing where we spend our money will make us aware and subconsciously make us prioritize things and experience that we actually want, and help prevent us from spending more money on new items just because our friends are doing the same. Tracking spending is not budgeting (we will get into that next), and tracking spending should not be viewed as a restrictive belt that forces us to adjust our lives, it should be viewed as a way to better understand how we in the past have spent while providing us the power to insure that we can afford items in the future that matter to us. Whether we prioritize affording the down-payment on a house, building a college savings account for our children, or simply saving for our retirement so that we do not have to work until we are no longer physically able to, planning is a crucial step into becoming more responsible and whether we like it or not, finances are important to us all and they are within our ability to personally control with a little education and a couple minutes of effort. By reading these blog posts you are already well on your way, and taking little simple steps will greatly improve our financial future.