Dec. 1, 2018
Everyone knows to watch their spending: A mistake can mean the difference between making or bouncing the rent check. I tracked my spending meticulously for a month. Here’s what I learned:
Earlier this year, I vowed to track my spending for a month, the same way you might track your food intake if you’re trying to change your diet.
Tracking your spending is nothing new, and money advice you’ve probably heard before. Maybe, like me, you’ve ignored this advice because you didn’t see the point. I figured I already had a pretty good idea of what my spending looked like. It’s not like I’m some shopaholic who can’t walk past a J. Crew without whipping out a credit card, and I know enough about my expenses to know when I have enough to pay the bills, and when I’m in trouble.
Nevertheless, one day I decided to look at my transaction history to see how much I’d spent in various categories over time (a feature that comes with popular budgeting tool Mint, but your bank may let you sort your transactions like this, too). In the previous three months, I’d spent a whopping $636 on Amazon alone. And what did I have to show for it? According to my purchase history, a few travel books, some shoes and a water pick. These purchases weren’t necessarily bad, but I underestimated how much they had added up. Perhaps I didn’t have as tight a grip on my spending as I thought. That’s no small amount of money, and for many, it’s enough to cover weeks of groceries, a car payment or even part of the month’s rent.
I decided to finally heed that basic money advice and start writing down my purchases, as an experiment if nothing else. It was a simple exercise, but a powerful one. And it taught me a few lessons about the way many of us spend money.
Spending is often the default for most of us — the first solution to any given problem. Need to get in shape? Buy a treadmill you’ll never use. Want to feel better about the way you look? Head into Bloomingdale’s and buy some self-confidence in the form of a new wardrobe. There’s nothing inherently wrong with spending, but it can become so second-nature that we often don’t even realize we’re doing it, and it’s especially easy when you shop online.
The simple chore of writing down every purchase, physically, with pen and paper, forced me to think before buying. This short pause made me more aware of how I use money, which is often as a knee-jerk solution. For example, I wanted to learn more about Ecuador before I visited, so I found a travel guide on Amazon and hit the buy button. Problem solved. Again, there’s nothing wrong with this, really, but it didn’t even occur to me to perhaps borrow the book or buy it used. Spending was the easy solution.
If you’ve never heard of “the latte factor,” it’s financial expert David Bach’s idea that cutting back on small expenses can lead to big savings. Detractors might argue that it’s slightly silly to expect that much out of a $3 cup of coffee — it’s just three dollars, after all.
The problem with this attitude is you start saying “it’s just three dollars” to everything. Impulse candy at the cash wrap? Might as well buy it, it’s just three dollars. Of course, this kind of spending adds up, but I think the bigger problem is that as you make more money, your $3 benchmark inflates. When I wanted to buy a fancy, leather-bound journal that I definitely didn’t need, I found myself justifying it this way: “It’s just $20, not even worth the time overthinking it. Just buy it!”
Having written a book about money, I like to think I’m pretty good with it. And being good with money, most experts will say, starts with a budget. If you pay yourself first — save a portion of your money before you spend it — then who cares what you spend it on? Give yourself some guidelines and you can spend like the world is going out of business.
But when I paid attention to the purchases I was tempted to make, I soon realized half the things I buy are mindless, impulsive items. Sure, I budget and pay myself first, but that doesn’t mean I’m spending my money in the best way possible. I could be saving more for retirement. I could be saving more for travel. When you’re more conscious with your spending, you might be surprised at how much more room you can create in your budget. It almost makes budgeting unnecessary because you spend less by design, and no longer need guidelines.
Shannon McLay, founder of the Financial Gym, a financial planning firm in Manhattan, said she asks new clients to follow the same experiment I did: Track every expense they make, every day, for a month.
“I’ve had clients save over $3,000 a month just from paying attention to where they’re spending their money,” Ms. McLay said. “They can use apps like Expenses Ok or Expense Keep or Excel or just the notes feature on their phone.”
I used an old-fashioned pen and paper and a notebook when I tracked my spending. It was a little less convenient than an app, but it seemed to make me more connected to the exercise. I didn’t just write down my purchases — I also wrote down the items I was tempted to buy, and the emotions and justifications I attached to them. This might seem a little touchy-feely, but so much of personal finance is touchy-feely. It helps to understand how you feel when you’re tempted to spend, so that you can watch out for those feelings later.
“After the month is up, figure out what you spent on a daily, weekly and monthly basis and determine if that felt high, low or just right,” Ms. McLay suggested.
From there, challenge yourself to spend less in the following month. It’s not an exercise you have to keep up with forever, but tracking is a good way to reset your spending habits and make sure you’re aware of how you spend.
And that’s really the goal of the exercise: awareness. It’s to simply spend your hard-earned money with a little more thought. It isn’t to say you’ll never give into another impulsive purchase again. For that, Ms. McLay suggested giving yourself a small cushion for surprises.
“I have clients regularly save into this fund for some amount from $50 to $500 a month to cover impulses, like a surprise happy hour with friends or a pop-up ad for a dress you want,” she said. “Having an account with money in it for times like this will not only control the amount you splurge but also make you feel better after doing it.”
Again, budgeting isn’t foolproof, but balance is important. Plan for your impulsive spending in advance to keep it tame, but track your purchases every now and then to reset your habits. You might be surprised at the things you’re tempted to buy when you start keeping track.