Finance Friday – Lesson 3: Track Your Spending

This is part of a series of posts on 10 Important Financial Lessons To Learn While You’re Young. A new lesson will go up every Friday. And if finances bore you, don’t worry…I’ll keep posting non-finance things on Mondays!

This lesson is super simple: track your spending. That’s it, that’s the entire lesson, that’s the knowledge I want to impart unto you. Bonus points to you if you take it one step further and create a budget; budgeting is the next lesson, watch out for it next Friday! But in case you were hoping for a little more, a little push in the right direction perhaps, I’ll share with you the story of how I first came to track our spending, and some important things I learned from that experience…

I first started tracking our spending about a year ago and it totally opened my eyes. In college I spent money when I needed to or wanted to, as long as I was sure I had the money in the bank. I didn’t really pay attention to what I spending the money on; if I had enough money to cover the purchase that was good enough. There wasn’t really more thought involved than that.

About four months into living on our own in Chicago I figured the grown-up thing to do was pay a little more attention to our finances, so I started tracking our expenses using Mint (a free online money management tool; we use it for budgeting too but more on that next week). Mint is great; it’s intuitive and intelligent and I was excited to start using it. I knew we were spending more money than “normal” and I justified it to myself by thinking “Well we just moved here, we need furniture, we need kitchen supplies, etc. We’re trying out some new restaurants in our neighborhood. Of course we’re spending a bit more now than we would in a normal month once we’re settled in.” (Aside: Chicago has great restaurants, it’s hard to keep on budget in that area while living here :-p) But after I got our account set up and some of our data loaded I was shocked to see the pretty pie charts and graphs that Mint generated from our data…

Pretty pie charts from Mint!!! (Just a current example, not the horrible graph from a year ago!)

25% of the money we spent over the last three months in 2010 went into the Food & Dining category. For reference 22% of the money we spent in that same time period went towards rent (just rent, not utilities etc.) We spent more on Food & Dining than we did on rent! Ok, I thought to myself, we still have to eat…I bet most of that went towards groceries, right? WRONG! Of that 25% on Food & Dining only 22% went towards groceries. Basically that boils down to this…close to 20% of our entire spending for three months went towards eating out at restaurants, getting junk food at CVS, eating out for lunch at work, and coffee! Holy sh*t! That’s still almost as much as we spent on rent in those three months! I was blown away. (Besides the ridiculous amounts of money we spent eating like that just can’t be healthy or good for you. Blech!)

Needless to say it was the wake up call we needed. Just knowing where our money was going helped us curb our spending a little; even without setting up a budget or anything official like that we started spending less money overall. We were more conscious of what we were doing every time we started to pull out our wallets, and just that little bit of consciousness helped us spend less.

Just a quick numbers update so you can get a better idea… For those same three months in 2011 we spent 3% less overall even though our monthly expenses went up about 11%, yay! I didn’t do the math, but basically that’s really good, rent cost more but we still managed to spend less. 🙂 Here’s the rest of the 2011 numbers:

• 19% of our total spending was spent on Food & Dining {versus 25% in 2010}
• 26% of our total spending was spent on Rent (a much better comparison ratio between the two! Plus that means we’re spending less on everything else as well since a higher percentage goes towards rent!)
• It boils down to 11% of our total spending was spent on things like restaurants, junk food, coffee, etc. Much much much MUCH better than 2010. 🙂

So now it’s your turn!

Do you have any idea how much you spend on rent versus groceries versus dining out and junk food? Try tracking your spending for a few months and see if the results surprise you. Mint is a great way to test this out because once you get your account set up and linked to your bank accounts or credit cards it automatically pulls the last three months of your spending history to start you out. It’s like tracking your spending for three months without the three months part. Bam, instant gratification!

Seriously though, I strongly urge you to track your spending, or at least be a little more conscious of what you’re paying for each time you pull out your wallet. Knowing you have enough money in the bank to cover your purchase is a really good first step, but knowing where the money you spend is actually going is better. It can be really helpful in reducing your spending, stretching your paychecks, and generally making your lifestyle a little more sustainable!

Go try it and let me know how it goes! Did you have a crazy wake up experience like I did?