Some links below are affiliate links, meaning we receive a commission if you make a purchase using the link. Phippen Tax only recommends books Xa or Patrick personally read or enjoyed, or products they personally found useful.
Most financial struggles either start with or are exacerbated by a lack of awareness of our own spending. Folks know what the rent or mortgage costs, what the car payment is, and the amount of the cell phone bill. But most individuals and households could not tell you how much is spent on groceries, dining out or takeout, clothing, toiletries, miscellaneous household items, upgrading electronics, yard supplies and new tools, hobbies, or entertainment of choice.
Not knowing what you spend hurts your finances.
Your annual spending is absolutely necessary when making financial decisions. You cannot make good financial decisions without knowing how much you spend across the various spending categories in your life. A few examples of questions you cannot answer without knowing your annual spending are:
How much money do I need to make to survive without going into debt?
What salary do I need to request just to make ends meet?
Should I apply to this job given this hourly wage?
How much money do I need to retire early?
How much money do I need to retire at all?
Can I afford to take that expensive vacation?
Can I afford to purchase a house with a certain interest rate resulting in a certain mortgage payment?
How much money do I have in my budget to pay off my debt more rapidly?
Do I have enough money to pay all my bills and debt minimums?
Can I afford to start a family right now?
Can I or my partner afford to stop working to stay at home during a child’s first year of life?
How much money can I contribute to growing my net worth?
And so many more.
Having an idea of how much money you spend in each category in an average year impacts your financial stability because it is a crucial variable in just about every personal finance calculation. In particular, it is necessary to calculate how quickly you can pay off debt, how much money you need to survive, what your FI Number is, and whether you can retire. If you want to feel secure when making your biggest financial decisions, calculate your annual spending.
The Best Way: Track Your Spending for a Year
The best way to calculate your annual spending is to track your spending for one year. Surprise! However, there are multiple approaches to tracking your spending, and you should identify the best one that allows you to track consistently. There are three general ways to track your spending: using pen and paper to record every transaction, tracking in a basic electronic spreadsheet, or using an app or computer program. There is no best way for everyone because we all have different daily habits.
If you have no idea how to consider which of these methods may be right for you, reflect on the habits you already have because setting the habit of tracking your spending will go better if you stack it next to another habit. Habit stacking is an ideal way to add a new habit into your life. In sweeping generalizations, consider your calendar habits when deciding:
If you are someone that almost exclusively uses their phone to add events to Google Calendar, iCal, or another scheduling app, you probably want an app to track your spending.
If you are also a Google Calendar user but generally have it up on a tab on your computer all day long so you can view the bigger picture, you may be an electronic spreadsheet spending tracker.
If you have a physical planner or calendar, you may want to use pen and paper to track your spending. (You also may even want to find a tracker that goes right in that physical planner!)
Still have no idea because you do not track your schedule very often? (You should!) You have an evening with no plans and are home alone. Outside of exercise, eating, and other activities, are you scrolling on your phone, using your computer, or doing something manual like reading or drawing? This is an indicator of your best tracking method to make the habit stick.
Pen & Paper
Before you write off the pen and paper method because it is not 1950, know that I started tracking my expenses for the first time with pen and paper. It was 2013, and I was a teacher making $36k. My day-to-day life involved teaching at a public high school, attending classes to get master’s degree #1, playing rugby for a team with a goal to win nationals, fitting in workouts at my apartment gym and the college gym depending on that day’s schedule, and attending Teach For America programming as needed. I am decidedly not an app expense tracker, and I did not always have a personal computer with me. So it was pen and paper.
Pen and paper is often useful if your lifestyle involves periods of time when you do not bring your computer and/or phone (whichever you would more naturally use) with you. In my personal experience, this meant periods of time when I had to go straight from work to rugby practice or the gym as well as periods of time when I worked in a sensitive compartmented information facility that did not allow phones inside. If you are not an app person and have a job that involves any physical labor, coach your kid’s softball team, or just do not want to carry a computer, then pen and paper may also be for you.
Expense trackers exist in numerous formats, but there are a few key categories that you must include:
Description of the Expense: This is a description that tells you what you bought. Think “Doritos,” “set of bed sheets,” or “Dodgers @ Mets tickets.” As long as you understand the description, it is sufficient.
Cost (Amount Spent): This is the total cost of whatever you bought.
Spending Category: Spending categories should be specific enough to be meaningful towards your life but also broader than the description. For example, it is usually good to separate dining out from groceries so you can identify if you have excessive spending in either category. You should also have specific categories for happiness spending areas. For example, those “Dodgers @ Mets tickets” would be in a “Baseball” category for me because I spend a lot of money on baseball. If you attend one baseball game a year, you do not need a spending category just for baseball. Your category may be “Entertainment - Sports,” and it would also include the one hockey game and two basketball games you attended.
From there, you can include as many additional variables as you find useful. Here is a sample of what my pen and paper expense tracker used to look like:
In addition to the essential categories, I liked to include the precise date to verify that I did not forget a transaction and allow myself to review credit card statements to identify any discrepancies. I also liked to track my total monthly spending to see how much I was spending over that month rather than just add it all up at the end of a month, quarter, or year.
Other categories that can be helpful include your method of payment. This is particularly important if you use cash, checks, or cash apps like Venmo, Apple Pay, Zelle, or others for transactions. A credit card or debit card statement will likely show you enough information to identify a purchase in the future, but this is not always the case for cash, checks, or cash apps. Another helpful category can be location of purchase if you want to have an idea of which specific stores, restaurants, or websites you frequent. Any category that helps you track your spending is a great one to add.
The Spreadsheet
If you spend time each day on your computer or prefer to view websites or your calendar on a computer, using a spreadsheet to track your spending may be the best method for you. A spreadsheet can be set up exactly like the pen and paper format, but you can add in formulas of your choice to help track your total monthly spending or the total in each category automatically.
For those on the same computer all the time, the basic Excel workbook will work for you. If you prefer the computer view but are a bit more on the go, a Google Sheet may be better suited for you since it allows you to typically use your personal computer but also add expenses from the Google Sheets app when you are away from your computer. Google Sheets have become my method of all things finances (as well as workouts) since I can be picky enough to organize the sheet exactly how I want it while maintaining the ease of editing from the app when on the go.
Using an App
So many apps exist to help you track your spending that it is overwhelming to pick the one that will work for you. Here are a few options based on your personal preferences:
Quicken: Quicken is another good option if you feel like you want the computer view but also the ease of accessing an app. It has budgeting features and can also help you track investments. While many know Quicken as accounting software and therefore not free, it is primarily a personal finance app and has convenient features like taking a picture of a receipt to instantly record an expense. (You can also use a business version to track the income and expenses for your side hustle.)
Mint: Mint is a free and simple-to-use financial app that can help you hit targeted goals like repaying debt or sticking to particular spending goals. This free app is the best for setting financial goals for yourself and even allows you to make a budget, if that is helpful to you. As a bonus, you can track your credit score through Mint.
Empower (formerly Personal Capital): Empower is also a free personal finance app like Mint. The setup caters less towards setting goals like debt repayment or general spending goals, but it has a more detailed dashboard and better details for tracking investments and retirement planning. If you are on the FIRE path, Empower may better suit your early retirement goals and allow you to receive the famous $100K net worth phone call when you reach the six-figure milestone!
YNAB: Like Quicken, YNAB has a cost, but a number of folks trying to overhaul their finances swear by its effectiveness. If you want to follow a budget rather than just tracking expenses but do not know where to begin, YNAB may be the step-by-step solution you need.
All of these apps allow you to connect accounts so the app can automatically update with any transactions that occurred within these accounts. Another bonus feature of these apps is that they provide a single place to track both your spending and your net worth rather than having two separate spreadsheets.
Why Does It Have to Be a Whole Year?
Yes, you can just track your spending for a month, quarter, or half of a year and extrapolate your annual spending. Why is this not good enough? You track expenses in the month of October. In October, you do not spend any money on your July beach trip, December gift buying splurge, or your April plant purchases. Your October purchase of $1,000 World Series tickets and transportation will also probably not be replicated in the eleven other months of the year.
Our lives go through seasons, and our spending reflects these fluctuations. Even if you take a one-week beach trip every month, it probably costs a bit more to get to a nice warm beach from New York City in January than it does in July. Costs vary. My favorite Starbucks peppermint hot chocolate costs more around the holidays than it does the remainder of the year because it becomes a specialty drink for the season. Even though I drink peppermint hot chocolates all year long, the one I buy in December before driving up to Connecticut to see my parents costs a bit more than the one I buy for a Sunday morning walk in October. I recognize these spending changes because I have tracked my spending throughout an entire year.
The Alternative Method: Calculate Your Spending from the Past Year
If you are excited to determine your FI Number today or figure out how much you can allocate towards debt repayment this year, you may not want to wait a year to calculate your annual expenses. Before offering the alternative method, I suggest you still track your spending for a year to make sure you do not miss cash, checks, or cash app transactions. However, you can get a ballpark number by going on a treasure hunt through your financial accounts. Here is how:
Identify every account you used to spend money last year: This means your credit cards, checking accounts, savings accounts from which you moved money, cash apps, and any cash you can track.
Download your account statements for each account for the past 12 months: You can just download these or print them out. Do what makes sense and what lets you read them as easily as possible.
Categorize every expense in each account: Assign a spending category to every single transaction listed in all of your account statements. Every single transaction! Just like the pen and paper method, these spending categories should be specific enough to be meaningful to you but broad enough that there are more than one or two transactions in a particular category.
Total your spending in each spending category: Whether in a spreadsheet or by punching numbers into a calculator, find the total sum spent in each spending category over the last twelve months, and record these amounts. You may want to record the total spend per category for each month and then find the sum of all months to identify seasonal fluctuations, but finding the annual total is the most important factor.
Calculate the total you spent for the year: Add together the sum of each spending category to get the total amount of money you spent for the entire year!
Whether you go on the treasure hunt to calculate your expenses over the past year to find your preliminary total annual spending or wait until you have a year of expense tracking, your annual spending is the most important variable in calculating many other personal finance milestones. You cannot maximize debt repayment without knowing your annual spending. You cannot determine your FI Number or how soon you can retire without knowing your annual spending. You cannot know if your salary is large enough for you to make ends meet without knowing your annual spending. Knowing your annual spending is an important step on the path to financial health!
Comments