Personal Finance Step 1: Track Your Expenses

You’ve been waiting with baited breath for step one of my money basics series (don’t deny it, I know you too well).

Today’s post is relevant because The Fat Jewish says that it is:


Over three hundred and fifty thousand instagramers resonated with this post enough to expend precious energy tapping their delicate thumbs on blue screens while lying in bed or sitting on the toilet at work. We don’t know how all of our peers are affording their high-life lifestyles while we are still earning half of what we expected post-grad. Here’s the thing. I don’t think they are. I don’t think the people you see spending a lot of money can actually afford to spend that money. They are going into debt. They are living paycheck to paycheck. They aren’t saving money, they are spending it. They can’t afford it.

Here is my definition of what I can “afford:” I can ONLY afford something if I can pay for it IN CASH TODAY (no financing needed) without dipping into my emergency fund or sacrificing my investment goals.

Afford does not mean that you have a line of credit that can cover the purchase and you get paid next week. It does not mean that the seller is offering 0% financing for the next year and you just know you will be the wealthy person you want to be next year and will have no problem paying for it.

To be clear, I am not advocating for an all cash system. In fact, I don’t think you should ever pay in cash if you can help it. You should always be taking advantage of credit card rewards (cash back, travel, etc.) and using credit cards makes it much much easier to track your expenses. Which is what this post is all about. I am saying that if you could not pay for your purchase today (i.e. put it on your credit card and immediately pay off that card), you can not afford it.

You really won’t know what you can and can not afford though, until you have a money game plan. To form your game plan, you need to know where you money is going. Here are some benefits of tracking your expenses:

  • You won’t know how big your emergency fund needs to be (I like 4-6 months of expenses) unless you know your monthly expenses.

  • Knowing your monthly expenses allows you to “pay yourself first” (i.e. put money into savings/investments immediately when you get paid) and not run into issues of money running out later in the month.

  • Reality check of how much money you actually spend on things you don’t need or even remember. If you ever want to accumulate your money, you need to know where it goes.

  • You just have to okay. Seriously, you have to.

The good news is, the interwebs has made tracking your expenses insanely easy! I have tried a few of the tracking apps/websites (such as Mint) and my favorite BY FAR is Personal Capital (it’s free btw, in fact they will give you $20 if you use this link). I think it is the most sophisticated and it has an emphasis on investing and building your net worth, which I obvi love. If you join Personal Capital you will have an investment adviser call you every now and again trying to give you advice. I just ignore the calls. We don’t need them or their fees guys, trust me, we got this!

In Personal Capital you link your credit card and bank accounts and it tracks your expenses for you. It looks like this:


Yikes! This has been an expensive month for us! Mainly because that top “online services” charge is our sweet little pup Finley who cost us a whopping $2k (thanks allergies). She gets to be the photo for this post because she has been our biggest expense in a while! So as you can see, Personal Capital shows you each expense and groups those expenses for you so you can see how much you spend in each category. It’s not perfect and you will have to re-categorize some expenses that Personal Capital mis-categorizes or throws into the “general merchandise” or “other expenses” buckets. (looks like I have some work to do). One of my favorite frugal exercises is to log in at the end of the month and see if I can remember what each of my Amazon purchases was for… OUCH.

5DA_9137 (2).jpg

This exercise can be very eye opening. When I first started tracking my expenses, I was spending $300-400 per month on clothes. That’s INSANE. That’s almost FIVE THOUSAND dollars a year on clothes. No one needs to be spending that much, especially not someone with an already full closet. Trust me, those little purchases you make are adding up much more quickly than you realize.

Tracking your expenses is the only way to get a true idea of where your money is going. Because I know that our expenses are usually around 3k per month, I know that a healthy (read risk-averse) emergency fund for us is 20k (a little over 3,000 x 6 months). So that’s what I keep in cash to cover anything that comes up.

It’s important to note that you need to include in your monthly expenses any loan payments you have. So if you have a debt balance on your credit card, your monthly expenses include the purchases you make on your credit cards during that month, AND any additional payments you have to make on debt you have already accumulated.

Part 2 of Step 1… Step 1(b)? Is to calculate your current net worth. Again, Personal Capital makes this easy for you. If you link your credit cards and any bank/investment/retirement accounts you have, it does the net worth calculation for you. But I like to do it myself, especially to start because understanding net worth is, obviously, key to building it.

Your net worth is your assets (all of money and appreciating assets) minus your liabilities (your debts). Put simply: net worth = what you have - what you owe.

Let’s work through an example. Let’s say I have $11,000 in my bank account, and $3,000 in my 401k through my employer. I also have $2,000 outstanding on my credit card and $7,000 in student loans.

Assets: $11,000 + $3,000 = $14,000

Liabilities: $2,000 + $7,000 = $9,000

Net Worth: $14,000 - $9,000 = $5,000

It is totally possible for your net worth to be negative. Let’s say I also have a car loan for $20,000. Now my net worth is -$15,000. Yikes! Let’s get to Step 4 ASAP!

If you have multiple debts such as student loans and several credit card balances, this can seem daunting. But it is crucial! You need to know exactly what you owe so you can work to eliminate that debt and get your net worth in the positives!

Another important point is that not everything you own is an asset that you include in your net worth calculation. You only include cash and appreciating assets. Appreciating means that the thing is going to become more valuable over time, like your home. If you own your home you take the value of your home (lets say $400k) and subtract your outstanding mortgage debt (let’s say $300k) to get your home equity amount ($100k in our example). You include the value of your home in the assets portion of the net worth equation, and your mortgage in the liabilities portion of the equation so that your home equity is included in your net worth. However, you DO NOT include things like cars, clothes, or boats in your net worth equation because those things are not going to gain value and are not going to earn you money, instead they are going to cost you money. Some people don’t even include their homes in their net worth equation because they are living in it and thus it is not making them money. I think including your home gives you a fuller picture of your financial situation so I like to include it. Ultimately, the only thing that will go on that assets side of the net worth equation is real estate, cash, and investments. Not personal goods that you own, no matter how much your car cost.

Okay, let’s recap. We need to track our expenses so we know where our money is going. That is the basis for any further financial progress. We also need to know our net worth so we can set goals and know where we stand.

Suggested Further Reading:

A sample expense report from Frugalwoods:

Annie Lawson3 Comments