Law #7: Track Your Personal Finances Diligently to Know Where Every Dollar Goes
The Law
The key to gaining control over your finances is to track where your money goes. It’s not enough just to track the amount in your account. Knowing how much money you have is only a tiny piece of the puzzle. The more critical part of the puzzle is knowing where everything went, down to the dollar. Tracking your expenses puts you in a position to start getting ahead of them—planning how you will spend your money in the future. You can’t change a habit until you know what it is. Sometimes all it takes to break a cycle of abusing finances is to expose the abuse.
Your Keys to Power
Use a web app. Apps can help you track your money with a quick and easy connection to your bank and credit card accounts, and you can access them through the web, which means from just about any device. Connecting to bank and credit card accounts is brilliant because the connection between the apps downloads your transactions into the app for you. Then all you need to do is categorize, although some apps automatically do that. These apps can make your life easier by reducing the amount of data entry or copy/paste you have to do to get your data into a format that allows you to categorize expenses and add up totals. There are a lot of opinions out there, but we’ve pared it down to two choices for you.
Mint rightly gets a vote—it’s free, has high Apple store and Google Play ratings, and connects with your accounts for automatic transaction downloads.
Quicken also gets a solid vote—it’s been around for decades, has several subscription options to choose from, and it’s very robust yet easy to master in just a few sessions. Quicken is a paid service, but you’re not dealing with pesky ads. Quicken’s various levels of the software include Simplifi by Quicken, a newer offering that brings personal financial tracking online and boasts an ability to help you “manage your finances in 5 minutes per week.” We think it'll take you more than 5 minutes, but it'll be worth it! Depending on your needs, you’ll also have the option to choose other account levels—Starter, Deluxe, Premier, and Home & Business. Check out the comparisons here.
A word of caution about both: neither app will do all the work for you. If you want something to work, as in most cases, you have to work it. Also, don’t be lured in either direction by the promise of free credit scores. Until either of these apps offer a FICO Score instead of a Vantage Score, all of that credit score monitoring mumbo-jumbo is pretty much for entertainment purposes only.
Use Excel or Google Sheets. If you’re not comfortable connecting your accounts to software, you can always copy and paste your transactions from your accounts into a spreadsheet like Excel or Google sheets. You may also be able to download transactions from your bank account in an Excel format already. This method will produce similar results as the apps above but know that you will invest considerably more time entering and categorizing the transactions. Some people prefer this privacy, which is totally OK, but we promised to share a pain-free method of expense tracking, and just a heads up—this is not the pain-free option.
Practical Application
Don’t get caught up in analysis paralysis. Choose one of these methods and dig in. Don’t get caught up in constant analysis that leads to paralysis and ineffective decision making, or even worse, no decision at all. The bottom line is that tracking your personal expenses, no matter how you choose to do it, is better than not tracking them. So if you start with a software that you end up not liking, that’s OK—just switch. You can always change the app at a later date. You may feel like you're "losing" a month of tracking but don't see it that way. Commit first to finding an app that works for you so that you can stay on your tracking game for years to come. That way, if you get going with an app and it doesn't work out, switching won't feel like a failure.
Think about the features that matter the most to you. Do you enjoy working on the go? An app with a robust mobile feature that works on your smartphone may be more important to you. Do you enjoy working on a desktop with a bigger monitor and a mouse? Do you loathe dealing with any of these types of things on the phone? If so, an app with a more robust desktop platform may be the best for you. Make these decisions based on who you are and how you use technology.
Consider working with an accountability partner. We’re not necessarily talking about a financial planner or a financial advisor in this case. Instead, we’re talking about someone who you trust to keep you on your toes. This person could be a friend working on their finances simultaneously, a colleague, a family member, or a mentor. The bottom line is to make sure that someone is engaging with you to follow up on your progress if you need help staying on task. Remember, flexibility is vital. You may need to start with someone as a force of accountability but not continue with that person once you settle into the groove. On the other hand, you may always need that accountability partner.
Don’t be afraid to invest a little money in your financial tracking setup. We’re going to be careful to explain here that we don’t want you to go into debt investing in technology or devices you can’t afford right now. But, investing in a tool like Quicken may be the best method for you if it will help you save money by tracking your finances in the long run. Similarly, if you have a device that does not allow you to engage with online banking, or if you don’t have a computer, that may be a wise investment if it will enable you to track your finances better. Sometimes, we have to spend initially to save in the future. Just don’t use that as an excuse to upgrade a computer that works well enough already to get the job done.
Carve out time to update your expenses for the week, and treat it like a ritual. Find your block of time to update your expenses each week—we call that "closing" your week. You’ll spend this time telling whichever app, software, or system you’ve chosen where you spent money. For instance, Quicken may download a $48.26 transaction with Amazon. You need to tell the system what you spent that money on—toiletries. As you get the hang of it, you’ll move through these transactions quicker each time you do it, but the system and all of your efforts will fail if you don’t do it consistently. Treat the time to close your week as precious and sacred. Put it on the calendar and avoid giving up that spot for anything that isn't a bona fide emergency. Try to make the time consistent each week. The more ritualistic you make this process, the more likely you’ll complete the close. Once you're in the groove, you can get this done in a few minutes if you only have a few transactions, or it may take you 20-30 minutes if it was a heavier week of spending.
Have some fun with it. If this type of financial management isn’t your thing, make it your thing by adding elements that you love. Make it a part of your self-care Sunday routine, before or after you hit the gym, or put it at the top of the morning—something you knock out before indulging in your enjoyment. Enjoy a couple of pieces of chocolate or whatever your vice is as you make it through your close to blend a little bit of naughty with your nice. Grab your laptop and head to the beach or park to close your weekly finances. Find the most beautiful hotel lobby or coffee shop your town has to offer and indulge in a treat while you get your week closed. This process can be enjoyable if you let it, and the beauty of technology allows you to do this from just about anywhere, especially if you’re working with a web-based app.
Never let the tracking responsibilities go beyond the week. How often do you swipe your card every week? A dozen times? Thirty times? That’s how many transactions you’ll have to complete. Don’t fall behind and end up with hundreds of transactions that’ll make you want to throw your hands up and quit. Close weekly. Schedule 52 close sessions, one per week, and stick to it. If you have an emergency or get sick, reschedule the session as soon as possible and catch up on that week of finances.
Stop spending cash if you can—and you probably can. Do everything you can to stop spending cash. Cash spending puts you in a situation where you have to work harder to capture the transaction because there isn't an automatic bank or credit card transaction to download into a system. Each cash transaction means you have to make a manual entry, which will increase how long it takes you to close your week.
Get in front of your money. Once you start to track your expenses (i.e., chasing behind your money), you’ll enable yourself to start getting in front of it to plan how you’ll spend money in the future. Future posts will dig deeply into budgeting, but start where you are for now—track, track, track. You can’t change a habit until you know what it is. Sometimes all it takes to break a system or cycle of abusing finances is to expose it.
Take a class. Sometimes, you need a community. Maybe you don’t want to let your friends in on your financial spending patterns. Maybe you don’t have someone you trust enough to bring them into the fold of something so personal. We get it, and that’s OK. Remember, the goal is to get it done, not necessarily to get it done within your current network. Taking a class with individuals who have had similar experiences and are now of like mind could be a fantastic way to get a jumpstart on tracking your finances and find a community of people who can serve as your accountability partners.
Authority
“Know the difference between your necessary and discretionary expenses.” - Alexa Von Tobel
“Becoming rich is hard. Staying broke is hard. Choose your hard.” - Eric Worre
“You don’t have to see the whole staircase, just take the first step.” - Martin Luther King, Jr.
“If we command our wealth, we shall be rich and free. If our wealth commands us, we are poor indeed.” - Edmund Burke
“The slightest adjustments to your daily routines can dramatically alter the outcomes in your life.” - Darren Hardy
”It is not necessary to do extraordinary things to get extraordinary results.” - Warren Buffett
“No man is rich whose expenditure exceeds his means; and no one is poor whose incomings exceed his outgoings.” - Thomas Chandler Haliburton
“You must learn to save first and spend afterwards.” - John Poole
“A man who both spends and saves money is the happiest man, because he has both enjoyments.” - Samuel Johnson
“If saving money is wrong, I don’t want to be right.” - William Shatner
“Look everywhere you can to cut a little bit from your expenses. It will all add up to a meaningful sum.” - Suze Orman
Our Vote
Our vote goes to Quicken. We aren’t a fan of ads—they’re distracting—so that’s a strike against Mint for us. We lean particularly toward Simplifi by Quicken because of the mobile features accessible through the web. Why? We love being able to log in and check on finances from across the globe, as long as we have an internet connection. However, one word of caution: if you run a small business, you may need a more advanced business option.
Reversal
Where ever you’re starting, there is no reversal to this law. If you bring in money, you must track how it goes out. This law goes for all forms of money, from your earnings to even government assistance. With free options, there is no reason to avoid tracking your expenses. Indeed, it's the first step in clarifying your current financial picture and what you can do to enhance your financial future.