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Peter Rothbart
When I first began saving and investing, I sought a lot of advice from personal finance gurus like Suze Orman and J.D. Roth. I wanted to both preserve what limited financial resources I had at my disposal and make my future earnings grow. These gurus taught me that developing sound money habits was a vital first step to achieving both goals.
While they sometimes disagreed about what those sound money habits should be, one recurring suggestion I encountered was to track every last penny I spent or earned. The premise was that before deciding where my money should go, I needed a clear picture of where it was already going.
I began by first tracking my expenses in a simple Excel spreadsheet. I diligently logged every last cent that came in or out of my life.
This included big things like paychecks and bills — but sometimes I'd log even just a quarter paid to a parking meter, or a quarter found on the street. I noted the date, location, payment method, and amount, along with a brief description for each entry. I used color coding to help me categorize and evaluate later.
While chronicling my finances in such fine detail was very tedious, knowing how much I really spent from month to month helped a lot with setting a budget for the first time.
Things like rent and health insurance premiums were easy to plan for, but my spreadsheet also clarified exactly how much I was dropping on "non-essentials" like desserts, movie rentals, and dodgeball league fees. Documenting these miscellaneous expenses enabled me to budget for my full cost of living — not just what most readily came to mind.
Second, confronting my spending habits in black and white gave me an honest view of where my money was going.
The numbers in the spreadsheet were objective. I couldn't downplay them or trick myself into believing I spent more or less than I really did. Knowledge is power, and knowing how I really spent my money — rather than how I liked to think I spent it — was empowering.
Finally, the spreadsheet illuminated areas where I was overspending, or even underspending. For example, when my trial period expired at the gym, I realized I wasn't getting my money's worth paying the full rate.
At the same time, I was using less than a third of what I'd budgeted for clothing and car repairs. Identifying these imbalances helped me recognize when I was being extravagant or tightfisted, and to reallocate accordingly.
I tracked my purchases this way for several years, but once I got a bead on my spending habits and devised a suitable budget, continuing to record every transaction didn't seem useful anymore.
I already knew how much I typically spent on staples like groceries and gas, and I had wrangled my other assorted expenses to the point that they no longer needed regular attention.
Even when my income rose, my spending remained nearly static as my extra earnings went mostly into savings. Adding more data points to the spreadsheet didn't give me new information, it simply rehashed the information I already had for a great deal of effort.
However, I considered that staying vigilant would help me detect future changes in my consumption. That feedback could keep me from sliding back into old spending habits or serve as an early warning system for other concerns, like higher fuel costs that hint at car troubles, for example.
But since overspending had never been a problem for me, I was confident I wouldn't start leaking money if I took my eye off the ball.
I also considered tweaking my approach so it would demand less persistent effort, perhaps by no longer tracking purchases below a minimum threshold, or by seeking technological solutions like budgeting apps to automate the process.
However, there was another, more pressing reason I didn't want to keep tracking every penny: Being hyper-aware of my spending gave me needless guilt over purchases that weren't strictly essential, even if I had budgeted for them properly.
I would end up feeling bad about buying things that were supposed to make me feel good, because minding every last cent had trained me to think that every last cent was crucial to my financial well-being.
My system was no longer working for me, so it was time to look for another. I still needed to pay some attention to where my money went, but I wanted to shift from scrutinizing my finances constantly in micro-detail to looking only periodically at the bigger picture.
I found a solution when I began using a strategy known as 'bucketing,' which involves separating funds that are earmarked for different purposes.
I seeded my primary checking account with enough to cover roughly two months of living costs, and I put funds reserved for savings, business expenses, taxes, and non-essentials into their own segregated sub-accounts. I then budgeted for monthly contributions to each sub-account, ensuring that all those bases would be covered.
This strategy vastly simplified the task of tracking my finances. So long as it stayed close to the amount I seeded initially, I knew I wasn't overspending.
If the balance of my main checking account was significantly higher or lower than expected, I could go back through my invoices, checkbook, and credit card statements to figure out why. It wasn't a foolproof approach — but it met my needs.
While developing sound money habits is important, recognizing when they've outlived their usefulness is also important. I'm grateful for the advice I received that led me to start tracking every penny, but I hope my experience will help others kick that habit once it no longer serves its purpose.
This article was originally published in February 2022.
