When you consider the most important thing you should be doing for your financial health, you’d probably assume it involves actually doing something with your money.

But increasingly, the advice coming from most financial experts is a little more passive – track your spending.

Understanding your spending is the first step to gaining more control over your finances. It’s the foundation on which you can build a rock-solid budget, responsible saving habits, and a foolproof investment strategy.

The best, most critical first step you can take to improve your finances is to track your spending.
Libby Kane, Business Insider

If you’ve struggled in any of those areas, taking a closer look at your spending will tell you why.

Here’s everything you should know to start tracking your spending.

Why You Should Track Spending First

They say if you’re going to diet, you should figure out how many calories you currently eat on a daily basis. Once you have a baseline figure, it’s much easier to estimate how much less you should be eating in order to eventually reach your goal weight.

Budgeting is similar.

It doesn’t make a lot of sense to cut expenses from a budget until you know how much you’re actually spending.

That will usually lead to overspending in some categories and underspending in others.

It can be discouraging to write up a budget only to spend more than you anticipated. Like an unrealistic diet, this can lead to splurging and eventually giving up.

When you track your spending first, you get an accurate idea of how much money is actually leaving your accounts.

Once you know your real numbers, you can decide where to cut and what to change.

I’ve seen this behavior with friends who have come to me for budgeting advice. They usually say, “Oh I don’t really spend more than $100 on restaurants and take-out.” When I make them sit down and do the math, they discover it’s closer to $200.

In the same way that chronic overeaters tend to underestimate how much they snack, people with shopping problems don’t realize how much they’re spending.

Even if you have pretty frugal financial habits, you might be surprised at how much money is going into certain aspects of your lifestyle.

How to Get Started With Tracking Spending

Start by going over your past month’s transactions, which you can find by looking over your bank and credit card statements.

Look through your transactions and assign each one a category. These can include:

Housing
Transportation, including car payments, gas, car insurance and repairs
Food including groceries and restaurants
Health insurance and medical bills
Utilities
Entertainment
Saving
Charity/gifts
Debt, excluding mortgage payments

You can track your spending as specifically or as broadly as you want. For example, I include my gym membership in my health budget, but you might want your ballet barre class to be part of the entertainment category.

If you went to Target and bought groceries and pajamas, you can lump that altogether or separate it into food and clothing categories.

If you don’t want to track your past expenses, start where you are now and mark future transactions.

Here are the three most common ways to track spending:

1. Pen and Paper

The old-fashioned approach is to write down your spending, usually in a notebook or on a dry erase board. Some people use standard journaling notebooks, but there are plenty of budgeting notebooks available for sale.

If you’re going to track your expenses by hand, you’ll want to establish a recurring time to do so.

Most of us buy things more often than we realize, and waiting until the end of the month to write down all your transactions is a massive undertaking. Make it a daily or weekly practice to avoid getting overwhelmed.

2. Track Spending in a Spreadsheet

An easy way to track your spending is to use a spreadsheet, either in Microsoft Excel or Google Sheets. Most banks and credit cards let you download transactions in a spreadsheet format, so you can easily upload them to your existing spreadsheet.

A spreadsheet is one of the most popular ways to track spending. Spreadsheets are simple and flexible. You can create your own categories and build your own simple reports and pivot tables to visualize where your money goes.

Tracking spending in a spreadsheet is a snap with Tiller.

Tiller connects banks directly to Google Sheets and Excel and automatically updates your spreadsheets with all your daily spending and transactions.

You can then manually categorize your spending, or have AutoCat categorize spending for you. A Tiller subscription includes the Weekly Spending Tracker template.

3. Bank or Credit Card

Many banks and credit cards provide their own tracking system within the online portal. Usually, the categories are already predetermined, but it’s an easy way to track your money without a lot of extra effort.

Some banks will even start categorizing for you, but their guesses aren’t always accurate.