So you read yesterday’s post about why you should track your income and expenses and now you’re jumping out of your seat with excitement because you can’t wait to get started! Ok, maybe that’s a bit of an overstatement, but hopefully you see why this can be a huge help in getting your finances into shape. The thing is, how can you actually do it?
There isn’t one right way
Remember that the reason you’re going to track your income and expenses is so that you know exactly how much money comes in and where it comes from, and how much goes out and where it goes to. That’s it. So as long as you have that information in the end, it really doesn’t matter how you get it.
There are a lot of ways to track these things, and no method is necessarily better than another, but one might be better for you. Just like some people feel more natural reading a book and others prefer an ipad or kindle, you have to find the method that works for you here. That means that if what you’re doing isn’t working, it’s too annoying, or you just can’t stand it, then try something else! My client Sara had tried an app and it wasn’t working out for her so she gave up. After several months she starting using a different app. It was easier, so she was able to keep going. Find the one that you can keep going with.
Watch out for cash
All of these methods require you to include cash in your tracking. An app can import debit and credit card transactions, but not cash. You can use spreadsheets based on receipts, but sometimes you don’t get a receipt.
Cash is a big deal. Most of us spend a lot more cash than we realize, so not tracking it gives us an incomplete picture. You might focus on non-cash tracking at first, but you will definitely have to include it at some point, so please keep this in mind as you read through the options below.
For me, I keep it simple. I have a little slip of paper in my wallet. Whenever I pay cash for something where I don’t get a receipt, like gas or a snack from the bakery, I make a quick note on that slip of paper. Ditto for income, like when I sell a table on Craigslist. At the end of the month, I add those items to my tracking software. Viola! Just find a method that works for you.
Pen and paper
- Source of income or recipient of payment (optional if this info is in the Notes)
- Notes (optional)
So for example, you might have these:
- 1/29/16, $950, Landlord Inc., Rent
- 2/2/16, $3.50, Starbucks, Meals & Snacks, Coffee
- 2/3/16, $75, Amazon, Gifts, Birthday gift for Janie
- 2/5/16, $2485, Employer Inc., Salary
Continue this for the entire month. Include notes when you need to. You should be able to look at any entry a year from now and know what it was for. If you can’t, then you need to put in more notes. Maybe you want to say exactly what Janie’s birthday gift was. Maybe you don’t care.
Create the categories that make sense to you. Maybe Meals and Snacks are combined, or maybe they’re two different categories. Maybe you have a Hobbies category or maybe you have a lot of hobbies and you want to split them out so you can keep track of each. Maybe you have more than one job and you want to track them separately, so you have more than one Salary category. Do what works for you. And don’t be afraid to make changes over time.
At the end of the month you’ll want to add up the totals of how much you received and spent, as well as categorize them. I find this to be the hardest part of this method, and it’s why I suggest that anyone who loves working with pen and paper also use a spreadsheet. But if copying the numbers over and adding them up by hand or with a calculator works for you, then go for it!
On the bright side, pen and paper are low tech, so nothing will break (assuming you don’t drop your notebook into a lake.) They can’t be hacked. You can leave them home or carry them with you. And it’s pretty unlikely someone will try to steal your notebook.
I admit it, I love spreadsheets. I use them for everything. I even created one for my clients to use for tracking. Enter your email address in this box and I’ll send you mine for free!
Or design your own spreadsheet that’s just right for you. You’ll want to include the same categories as with the pen & paper approach above. It will be easier for you to categorize your income and expenses at the end of the month, though. You can sort, filter, use pivot tables, or anything else that you like.
There are a lot of accounting programs out there. An established one you might have heard of is Quicken, but there are others out there. These have a bit more of a learning curve, so they might be harder at first, but once you figure them out, they have all sorts of great functions.
For one thing, every time you enter a transaction, you will automatically fill in the categories listed above. They’re right there, asking to be filled in, so it’s hard to forget one. These programs also make it easy to handle the month-end process that I’ll get into in another post. And when you want to look at your income or spending in different categories or over different time periods, it’s super easy and quick.
These aren’t for everyone, though. Some people find it annoying to enter cash transactions, especially when they’re out and about. And some people are intimidated by the tougher learning curve at the start. But if you’re comfortable with these programs, they can be a great choice.
Unfortunately, unlike spreadsheets or pen & paper, you have to pay for these programs, so keep that cost in mind. It might or might not be worth it to you.
There are far too many apps for me to list them all here, so I’ll just tell you about a few that I heard good things about. I haven’t tried any of these myself, but with so much variety out there, there’s probably one that works for you.
First, you can use a notepad app and do the electronic version of paper & pen tracking.
Then there are all of the apps that are designed to track your money. Mint.com is free app that is very popular and it works on your smartphone, tablet, and computer. In imports your transactions so that you don’t have to enter each one yourself. Unfortunately, it isn’t compatible with every single bank and loan company. It also does not have a way to track cash, which I think is a big problem. In addition, it automatically categorizes your purchases and you need to manually adjust those. It’s so easy to just let Mint categorize everything that you end up with some inaccurate information. Maybe that dinner out was a business dinner, not personal entertainment. Maybe your department store purchase wasn’t all clothes, but also gifts for others. This kind of setup can be great, as long as you put in a few minutes each day, week, or month to make the adjustments.
YouNeedABudget.com is also hugely popular and also works on smartphones, tablets, and computers. Like Mint, it imports your transactions. However, it also allows you to add your own transactions, such as cash income and purchases. What a lot of people love is that it also helps you set up goals and encourages you to reach them. I’ve heard only great things about YNAB. Unfortunately, it isn’t free (unless you’re a college student.) If you feel you’ll save more than you spend on your subscription, though, it might be worth it.
What I do
It took some time, but I found a method that works for me. I save all of my receipts. Like I said before, I have a slip of paper in my wallet and I note down any cash purchases or income that I don’t have a receipt for. Once a month (yes, I tell you to do it weekly at first, but after a while once a month will be just fine) I sit down with all of my receipts, that slip of paper, and my bank statements. I enter everything in accounting software. It’s sort of like Quicken, but designed for small business use. I got used to this program back when I did bookkeeping for a company, and it was easiest for me to keep using the program that I was already familiar with.
For me, this is the perfect method. For you it will probably be something else. Go find your perfect method!
Once you have all of your income and expenses tracked, what do you do with the information? I’ll cover that next time. It’s not hard, but it deserves a post of its own. In the meantime, go start tracking!
If you haven’t read it yet, check out Why tracking your income and expenses is your best path to success.