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How much did you make last year? Chances are, most of us can answer that question pretty easily – all we have to do is look at our tax returns.
Here’s a harder one: What did you do with what you made last year? With a bit of work, most of us could probably arrive at some numbers for key costs like housing/utilities, credit card payments, car payments, etc. But what happened to the rest of the income? We have some vague ideas about what we spent money on, but most of us would be hard-pressed to identify with any precision how much we spent in each area.
Why Track and Categorize our Spending?
Scripture makes it clear that we will give an accounting to God for all that we’ve been entrusted with, and this includes our financial resources. (See for example Romans 14:12; Hebrews 4:13; Luke 12:48; Matthew 12:36. If even our careless words will require an accounting, how much more our use of God’s provision?) But how can we account to God for our use of his provision if we haven’t kept track of where we’ve spent it?
Further, how can we know if we’re on the path to financial freedom if we’re not measuring our progress on debt retirement, our practice of generosity, and our provision for the future?
The value of intentionality
Tracking and categorizing our spending helps us to be intentional about how we’re using the resources God has given us. Most of us are spending more than we realize in areas that we’re not tracking. This is why we’re hard put to provide any meaningful answer to the question, “Where did it all go?” We can’t manage what we don’t measure.
Think of it this way: One of the first steps always recommended by nutritionists and weight-loss coaches is to track what we eat. They recommend this because they know that the very act of tracking forces us to recognize our habits and increases our intentionality.
Of course, recording our spending requires a bit of discipline, just like journaling our food. But we make time for the things we care about – and if we care about financial freedom and God-honoring stewardship, then tracking and categorizing our finances should be a non-negotiable.
If you’re not already regularly tracking your spending, the task may seem a bit daunting. How do you categorize various types of expenses? Do you really have to record every single penny? If you’re married, how do you get both spouses tracking so that there are no “surprises”?
How to Track and Categorize Expenses
There are many tools you can use to track and categorize expenses – paper forms, spreadsheets, apps or programs, or even websites. Each of these has its advantages and disadvantages. Paper forms are easiest to set up and maintain, and easiest for multiple people to access. Electronic forms can produce better and more flexible reporting, and are still relatively easy to set up and modify. Apps, programs, and websites give you the most built-in functionality, but generally take the longest to set up.
We recommend keeping things simple in the beginning with a paper form. Paper forms are quickest to set up, easiest to maintain, and most accessible by multiple people (like a couple). If you’ve established the habit of tracking and categorizing and feel a need for a more detailed system, then one of the electronic methods will serve you well – and you’ll be ahead of the game because you’ll already know from experience what categories you need to track.
The remainder of this article will assume that you’re using a paper form (and we’ve provided a downloadable example to get you started), but the concepts will apply regardless of which method you choose.
Types of Expenses
Some of your expenses, such as bills, recur on a monthly basis at the same time each month. Other expenses, such as groceries and household items, occur at varying frequencies and various times of the month. If using a paper form, it’s best to track monthly expenses separately from daily expenses. Since monthly expenses are usually obligations, keeping them on a separate side of the form can help you ensure that you don’t miss any payments; if you lump monthly and daily expenses together, it’s easy to miss whether a specific monthly payment has occurred.
Some of your expenses are fixed, remaining the same from month to month (such as mortgage/rent or car payments). Others are variable, changing each month. Recurring monthly expenses (like bills) can be fixed or variable; daily expenses are nearly always variable.
Finally, some expenses are discretionary and some are non-discretionary. For example, housing, clothing, and food are non-discretionary expenses – we have to have them. Entertainment and some household expenses are discretionary – we can choose to spend on them or not.
Categorizing your expenses
The first step in tracking and categorizing expenses is determining what categories to track. The exact categories you’ll want to track are a matter of personal preference, but here are a few general tips:
- Completeness: Track all the expenses that you pay. We recommend including items deducted from your paycheck, other than taxes. You’ll also need to track those expenses that are automatically charged to your credit card or deducted from your bank account each month.
- Relevance: Set up your categories in such a way that you’re tracking material amounts. Feel free to combine related categories if it makes sense. For example, if you pay a Homeowners’ Association fee each month, you might decide to combine that with your mortgage payment (especially if they occur at the same time and are automated). On the other hand, you can separate out expenses where you want to track categories more closely. So, for example, one person might include all food under one category; another might choose to segregate food from a mail-order food service.
- Materialism: It isn’t necessary to track every single dollar in a specific category. Set up a petty cash fund that you can use each month without tracking every expenditure. But make sure it’s “petty” cash – if you’re buying 2 5-dollar coffees each day, that’s likely worth tracking separately.
With those general tips in mind, here are some specific recommendations.
These are reflected in the downloadable spending record available from this article. Feel free to update these to suit your needs. (For example, if you’re living with your parents, you may not need the Housing category.)
Giving
Include all charitable contributions here. Do not include gifts for occasions such as Christmas, birthdays, etc. These should be categorized under Household expenses. If you give regularly, include this on the “monthly” side of the expense form. If you give more sporadically, you might put this on the “daily” side.
Savings
Include all forms of saving, including any retirement plans that you contribute to out of your paycheck. This will usually go on the monthly side of the form.
Debt Reduction
Include all debt payments except for mortgage and car payments here. Again, this will go on the monthly side of the form.
Housing
Housing includes all the expenses associated with your house or apartment, including rent/mortgage, utilities, services, maintenance, etc. If you bundle your internet, phone, and cable services, we recommend breaking out cable and including that with other streaming services under Entertainment. If you rent a separate storage facility, include it in “Other” under this group. These expenses will typically go on the monthly side of the form.
Auto & Transportation
This group includes all the expenses associated with your car(s) and any public transportation you regularly use. Include car payments and auto insurance on the monthly side of the form; put other transportation expenses, such as gas, auto maintenance, etc., on the daily side.
Insurance
This group includes all insurance premiums other than auto and homeowners insurance. Don’t forget to include any health or other insurance premiums deducted from your paycheck.
Household
Include here all the expenses it takes to keep the household running – food, clothes, etc. Children’s activities and pet expense (other than vet) should also go here. Include gifts, such as birthday and Christmas, in this group as well.
Professional Services
This group includes Medical expenses, vet expenses, and other professional services such as counseling or other therapy. Also include any current education expenses (private school, etc.), but not school loans (these would go under debt retirement). We recommend including daycare here, although you can choose to categorize that under the Household heading.
A special case under Professional Services relates to medical expenses. If you contribute to a Health Savings Account (HSA) or Health Care Account (HCA) out of your paycheck, we recommend counting these deductions as medical expenses. Beyond that, include only medical expenses that you pay outside of these accounts; if you cover expenses from within these accounts, don’t count those, since you’ve already included the contribution as a medical expense.
Entertainment
Include under entertainment: costs from cable or other TV services, streaming services, hobbies, and events such as movies, sporting events, etc. Dining out and vacation expenses should also be categorized here (including expenses related to driving that might otherwise be categorized under Transportation).
Make it yours
There’s a certain logic in this division of categories, which we’ll discuss further in an article about creating a Spending Plan. Generally, items in the Giving, Saving, Debt Retirement, Housing, and Professional Services areas will be non-negotiables; although you may have some control over the amounts, the categories themselves are required. Items in the Entertainment group are negotiable; you can eliminate these if needed. Household and Transportation items are mixed between negotiables and non-negotiables. When it comes time to create and adjust a spending plan, categorizing as we’ve recommended will help you determine the easiest opportunities for making adjustments to your spending.
Obviously, there’s room for flexibility in these categories. For example, if your job involves traveling such that you eat most of your meals out, you might categorize that under food rather than entertainment. If you use your car partially for business and partially for personal uses, you may need to split out some of the transportation categories to help you keep business and personal expenses separate.
Tips for Success
While tracking and categorizing expenses isn’t difficult, it does require some discipline and may be a bit hard to get used to at first. With that in mind, here are some tips to help you get started and keep going.
- Start with paper. As we mentioned earlier, a paper record is easiest to set up and maintain, and also easiest to access for a couple.
- Round to the dollar. Don’t worry about tracking every penny!
- Set up a petty cash fund. Create an expense category called “petty cash” and record a monthly expense there – say $100. When you spend cash out of this category (typically for items of a couple dollars or less), don’t record the individual expenses. If you go over the $100, allocate a further amount. If you regularly exceed the $100 over the months, consider whether some of the “petty cash” expenditures should be categorized separately.
- Track it all. That includes expenses paid for by cash, credit cards (and all the offshoots, such as apps), automatic withdrawals, etc. The automatic expenses are often forgotten (in fact, that’s what marketers and sales folks are counting on!).
- Keep the record accessible. Keep your record in a place where both spouses can easily access and update it daily.
- Set a time and place. Make a time and place each day to record that day’s expenses – don’t let them pile up! As a daily discipline, this takes only 2-3 minutes a day. But if you let it go for several days, the time required to catch up can get discouraging.
- Track your tracking. There’s a place on the form to mark off each day as you record that day’s expenses. If you get through a month and you’ve recorded expenses each day, reward yourself! (But keep it reasonable!)
Maximize the benefit
If you’re tracking and categorizing consistently, then you’re getting the benefit of seeing what’s actually happening in your finances. Not just guessing or estimating, but really seeing and understanding. But when you’re ready to start taking some next steps to maximize the benefit of tracking and categorizing, here are some ideas.
- Track across months. The Spending Record form gives you the opportunity to track expenses across multiple months, using the “last month YTD” and “this month YTD” lines. Some expenses, like clothes or auto maintenance, don’t happen every month. Using these lines gives you a chance to see more than just the current month and to understand your overall spending picture better.
- Track the over/under. If you have a Spending Plan (we’ll address this in a separate article), include the numbers from that plan in the first row for each category. Then, at the end of the month, compare your total spending to the plan numbers and indicate the amounts over or under your plan. If you’re consistently over or consistently under your plan, you need to either adjust your spending or update the plan.
- Analyze the over/under. For areas where there was a significant difference between plan and actual, review those categories and understand the reason for the difference. Were you “over” in clothes because of back-to-school? If so, were you “under” in several previous months? Then maybe you’re OK. Note areas where you did well compared to plan and areas you may need to watch.
Start Today!
Do you know anyone who puts off going to the doctor because they’re afraid of bad news? Does the news get better because they don’t go? Managing our finances is somewhat like this. Sometimes we’re afraid of what we’ll find out if we start tracking our expenses. But ignorance is not the way to financial freedom any more than denial is the way to good health. If you’ve found yourself squeezed to meet all your bills at the end of the month, or wondering at the end of the year where all the money went, then tracking and categorizing your spending is the first step to freedom.
And not tomorrow! Today! Download the Spending Record using the button at the bottom of this article or create your own – but don’t delay.
Jesus told parable after parable about his return and consistently emphasized the urgency of being ready (see, for example, Matthew 24:36-25:13). In the parable of the Rich Fool (Luke 12:16-21), the hour of accountability came when the main character was not expecting it. James warns us that we don’t know what will happen tomorrow (James 4:14-17) and ends up with this admonition: “Whoever knows the good he ought to do and doesn’t do it, sins” (v. 17).
Jesus may not return tomorrow. And we may not die tonight. But the consistent exhortation of Scripture is to do the good we know we ought to do and not put it off. Go and do likewise!!
FAQs about Tracking & Categorizing
As each person’s situation is a bit different, it’s impossible to anticipate every question that might come up about tracking and categorizing expenses. But hopefully the following will give you some guidelines you can apply in your circumstances.
Q: I don’t know how much I’m spending in each category, so I can’t tell if I’m over or under in a given month. How will it help to track if I have no comparison?
A: First, you’re in the same boat as most of us! Most of us don’t know how much we’re spending, especially in categories that don’t come as monthly bills. But tracking our spending is exactly how we answer that question – after you’ve tracked for 2-3 months, you’ll have a pretty good estimate of what you’re spending in each category.
Q: Is there any value in recording past expenses?
A: Absolutely! If you have decent records over the past two or three months, filling out Spending Records and putting your expenses in categories over that time period would be a great place to start. This will give you a jump start on understanding your spending in each category and something you can measure future months by.
Q: My mortgage payment includes principal, interest, homeowners’ insurance, flood insurance, and PMI. Do I track all these things separately?
A: No. At least, not to start. There’s some value in knowing these numbers but for tracking purposes your mortgage payment is the same every month and that’s the amount you need to track. Later, if you opt for an electronic tracking system like an app or program, you may find value in splitting out this transaction.
Q: I have business-related expenses that I pay personally and am not reimbursed for. How should I track these?
A: Create a separate group for these. Whether you’re an entrepreneur, a contractor, an author, or any number of other income-producing activities – you should track your business expenses separately. You’ll need that information for taxes anyway. If you have a number of different types of expenses for your business, then you might consider making just one column on your Spending Record but then keeping a separate, more detailed form where you split these expenses out.
Q: I contribute to a Health Savings Account out of my paycheck. How do I track this?
A: Technically this is savings, but since you can’t use this money for just anything, it’s best to think of it as a pre-paid medical expense. Track the deduction as a medical expense. Then don’t track anything that you spend out of that account (because you’ve already counted everything in the account as a medical expense). If you have additional medical expenses that you don’t pay from your HSA, track those as part of your medical expenses.
Q: My employer matches part of my 401(k) contribution. How do I track that?
A: For simplicity, it’s best not to track this – at least at the beginning. It’s not an expense you’re paying and it’s not a deduction from your income – it’s an addition to it. At the same time, it’s not income that you’re free to use. If you later convert to an electronic system and want to track this separately as income and savings, you can do that – but it doesn’t add real value to tracking and categorizing spending.
Q: Some of my expenses vary widely from month to month, which makes calculating an over/under meaningless. Is it worth tracking these?
A: Absolutely! In fact, tracking these expenses is a real key to success precisely because they do vary so much. An individual month may not be very informative for you, but the Year-to-Date amounts should help you get a monthly average. You can compare a given month to this average – not necessarily as a “win” or “loss” for the month, but more to inform you in spending overall. For example, if your income is relatively stable, then a month in which your variable expense goes high is a month in which you need to really watch discretionary expenses in other areas. Tracking and understanding when your variable expense is out of line with the norm will help you to avoid surprises.
Q: We make enough every month to cover our bills and expenses and even set some aside for saving. Do we really need to track each expense?
A: First, you’re in a great place! Second, yes, you do need to track! Here’s why. While you’re in a good place today, tomorrow will bring a surprise. Maybe you’ll need to replace a car and start making car payments. Where will that money come from? If you don’t understand your spending today, how do you know how much payment you can afford? Most people in situations like this consider the decision in isolation (“This is the car I want”). And they don’t take the time to consider how that decision fits in with the rest of their spending. If you’re tracking and categorizing your expenses, you’re giving yourself the best opportunity to keep winning financially.
This is an appropriate place to bring up the subject of generosity. God gives us resources not only for our own enjoyment but also to use for his purposes. If we don’t understand how we’re spending today, then we’re limited in our ability to maximize our generosity.
Q: We’re in crisis mode financially – we don’t have enough each month to make ends meet, and we’re getting deeper in debt. Will tracking our spending really help? We’ve already cut as much as we can.
A: Yes, tracking your spending will definitely help! Granted, it’s not going to be pretty at first. And tracking alone won’t solve your crisis. But it’s doubtful that you can solve your crisis without first tracking and categorizing your expenses. As you learn about where your money is going, you may discover some keys to address your financial situation. Maybe you’re house-poor, or car-poor – putting too much of your limited resources into paying for these high-ticket items. Perhaps you’re contributing to a 401(k) out of your paycheck when you should really be using that money to stabilize your finances by retiring debt. You might be surprised at what you’ll find when you really start tracking.