Is there a right way to track expenses?

I introduced a free spreadsheet to track your expenses (for the file, see the financial tools page) about a week ago, and I’m thrilled that people are finding it easy to use and helpful to their finances. Thank you for the support, and please feel free to contact me with suggestions.

Earlier this week, one user asked me a question on how to use the tracker:

Presh, I noticed you started the [Expense] Tracker on September 1st with a corresponding paycheck of September 1st. If my first paycheck is dated September 6th, should I not record any expenses prior to the sixth? I’m wondering if an accurate, up-to-date spreadsheet requires all of the recorded expenses to be withdrawn from the first entered paycheck.

Here is what I replied back with:

The answer is that it actually doesn’t matter when you start. If you started on September 1, then go ahead and leave in the expenses before your first paycheck. If you want to start from your first paycheck on Sept 6, that way is fine too.

The reason it doesn’t matter is that spending and income will average out over a few months. This will be more obvious when you track a full year of data.

I like this question a lot, because it made me realize there really is no “right” way to track expenses. The “right” way to keep track of things depends on how precise you want the data and more importantly, what you want to use the summaries for.

If you input every piece of financial data starting from January 1 of a year, you can actually track to the penny where your money is going. I can say this because that is what I do. I do this since I’m a numbers freak, so I feel happy when my company annual tax summary matches my records of taxes paid.

If you are slightly less detailed, and instead make sure to input every purchase over $1.00, then you will still really have good sense of where your money is going. You can figure out that your expensive car is taking up lots of money through maintenance, or that you may be renting a place that’s too expensive for you.

The real purpose of the expense tracker is to help you make better decisions. When you know where your money is going, you can then make decisions on how to improve your situation. When I started tracking my expenses, one of the first things I learned was that I spent way too much eating out, so I started cooking at home a lot more. These broad-reaching plans are what I call “global financial decisions” since they account for the overall state of your money and not just one-time decisions, like whether an ATM is worth the fees if you need cash right away. (my answer: yes for a few times, no if it becomes a pattern)

Once you start tracking expenses, you will likely improve your personal finances by planning better and making better decisions. And that will get you a lot further than simply thinking about personal finances as a money-oriented field.

Click here for a link to download the Simple Expense Tracker.