Expense Tracking: How To Do It Effectively

Hello, readers! Welcome back to the Hoods Tax & Accounting blog! If this is your first time here, welcome! We’re delighted to be able to share up-to-date information about taxes, bookkeeping, and accounting. Our blog is also dedicated to educating you about tax-advantaged savings accounts, tax provisions, programs, and more! We aim to provide you with the tools needed to meet your short and long-term goals. Our seasoned professionals are experts on the tax code, eligible deductions, and QuickBooks—all necessary fundamentals for saving you money! The Hoods Family has been around since 1988 and our comprehensive accounting and tax planning services are among the best in the Lowcountry. If you’re in need of tax preparation, accounting, QuickBooks training, or business consulting services, do not hesitate to schedule an initial consultation! We are officially in tax season, and Tax Day is fast approaching. We recommend preparing early to maximize your savings and refund. We do offer contactless services using a combination of over-the-phone consultations and digital drop-offs, for safety and convenience. You can read more about our hours and submit a request for a meeting using our website!

Although tax season is over, we are still available to help with any questions or concerns you may have. Before we get into today’s topic, we would like to make you aware that this month, we have begun to offer tax planning appointments to assist with questions about withholding, small business tax, retirement and investment accounts, sale or purchase of rental properties or other estates, and more! Reach out to us to set up an appointment with one of our knowledgeable tax professionals. 

Today, we’ll be discussing expense tracking and how to do so effectively. Expense tracking is a great way to monitor your expenses across the board, especially if you have multiple bank accounts and credit cards. Not only can this help you see where your money is going, but it can also allow you to pick up on your spending habits and alter them if needed. Although your bank account and credit card show you a summary of your purchases, it is easy to turn a blind eye to how much you are actually spending. That’s where expense tracking comes in. If you are interested in learning some tips and tricks on how to track your expenses, you’re in the right place! Let’s get started.

You might be thinking: Isn’t expense tracking the same as budgeting? People often use these terms interchangeably, but the truth is they are actually not the same. Budgeting refers to a financial plan, or a plan on how to spend your money. Expense tracking is going back and looking at the purchases you’ve made. Budgeting is done ahead of time, while expense tracking is done after the fact– Therefore, budgeting is proactive while expense tracking is reactive. Tracking your expenses will allow you to alter, or even create, a more realistic budget. You can see how you’re spending your money and determine how you’d like to spend it instead. Here are some tips and tricks on expense tracking!

Write Down Expenses

The first, and possibly the most obvious, thing you’ll want to do is to actually keep track of your expenses. This can be done by writing them down, typing them into a document on your computer or phone, or by using an expense tracking app. However you choose to do it, make sure you are being honest and recording everything. This should include the $2 tip you left for a barista, and the $25 you spent on that candle that you didn’t really need. Even if you know you spent more than you should, hold yourself accountable for all of your purchases. Additionally, it is important to keep in mind that writing down and tracking your expenses is a long-term activity. You cannot see an accurate picture of your spending habits with only one month of tracking. Stick with it!

Keep Track of Income

Another thing you want to make sure you are recording is your income. How much do you get paid, and when do you get paid? If your income is irregular, it is important to write down the amount you receive each time you get paid, as soon as you get paid. Don’t estimate or guess what your paycheck will be– You want to accurately account for each and every dollar you have. If you anticipate a specific amount of money but end up receiving less, it can throw your whole expense tracking plan off. Have a side hustle? Make sure you’re keeping track of that income, too. Did you receive money as a gift for a holiday? That should be written down as well. 

Categorize

After you’ve written all of your expenses down for the month, you’ll want to categorize your expenses. In other words, group your expenses into different areas such as entertainment, food, and necessities. However, you don’t want to go overboard with making categories– Don’t make them too broad or too specific, and don’t make too many. (Pro tip: Avoid using a “miscellaneous” category!) This will just cause confusion and be too hard to keep up with. Your expenses will consist of fixed and variable expenses. Fixed expenses are things that tend to stay the same every month, like the cost of rent. Variable expenses are things that tend to fluctuate, like food or clothing. 

In order to make expense tracking easier, our recommendation is to use the 50/30/20 rule: 50% of your income should go towards needs, 30% towards wants, and 20% towards savings. When you write down every purchase you make, you can easily see if that purchase fits into your “needs” or “wants” categories. And, at the end of the month, you can see just how much money you have leftover for “savings.” If you feel that you need to move around some money into these different areas at times, that’s okay! For example, if there is a “just for fun” purchase that you really want to make this month, see if you can afford to move a few dollars out of your “savings” and into your “wants” category. Just remember that no matter how much money you move around, you don’t want to exceed your income.

Projected Costs and Actual Costs

You’ll want to check your bank and credit card statements across all of your accounts to see exactly where your money is going. From there, you can estimate your projected costs for each month. When you get paid each month, how much of that paycheck goes towards bills? What types of purchases do you make on a regular basis? For example, do you do a large weekly grocery shopping trip? You should take all of these things into consideration when estimating your projected costs. Keep in mind that your projected costs should never exceed your total monthly income. If they do, you’ll need to go back and adjust some things. For example, if it looks like eating out is leaving your bank account teetering on the edge, you may want to plan on cutting back next month. 

After you’ve estimated your projected costs, you’ll want to check all of your actual costs at the end of the month. This means tallying up every dollar that you spent throughout the month. Every purchase, no matter how big or how small, should be included. Don’t forget cash purchases, even small ones, that may not have a receipt. When you have your actual costs all laid out in front of you, you can identify the differences between those and your projected costs. Did you fall above or below your projected costs? If you fell below your projected costs, take a look at where you fell short. This will help you identify spending areas that you need to work on for next month.

As you can see, expense tracking is an extremely helpful way to keep track of how much money you have and where it is going. This allows you to feel more in control of your finances, rather than blindly spending and wondering where all your money went! We hope you found this article helpful, and we encourage you to try practicing expense tracking! Here at Hoods Tax & Accounting, our tax professionals are always eager to give our clients as much help as possible when it comes to their finances. If you have any questions regarding your taxes, or if you need help with tax planning, contact us! Hoods Tax & Accounting offers a variety of services including small business consulting, QuickBooks training, tax preparation, accounting, payroll, and more! Visit our website for more information, as well as helpful links to resources you may find useful. Thank you for reading and we hope to see you back next time to keep learning about various tax and accounting topics!