Spend less than you earn. Save, invest, or pay off debt with what’s left over.
This may be the most crucial concept in the universe of personal finance. It’s deceptively simple, but oh so difficult to master.
Part of the reason is that it’s extremely difficult to control spending. Let’s face it, most of have absolutely no clue as to where our money goes. We can’t recall how much we spend eating out, buying clothes, or paying for utilities. As a result, our financial lives spin haplessly out of control.
The truth is, you will never become financially free until you learn how to control your spending. You will never learn how to control your spending until you understand where you spend your money in the first place.
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That’s why tracking your spending is the very first step to gaining control over your money.
But here’s the kicker. Most of us are too lazy to do it. We’ll make every excuse in the world to avoid tracking how we spend our money. We convince ourselves it’s too cumbersome, too time consuming, or not necessary. And then we wonder why we’re having so many money problems.
Tracking spending separates those who are truly serious about changing their financial situations from those who just talk a good game.
Start by simply carrying a small notebook with you. Every time you make a purchase, no matter how small, record it in your notebook. If carrying a notebook is not your style, just collect a receipt for everything you purchase. At the end of the day record your spending in a spreadsheet.
I know it sounds cumbersome, but it’s the price you must pay to get your financial house in order.
Applications like Mint at mint.com make it even easier. Register your credit cards and bank accounts with Mint and the free service will create automatic charts and graphs of your spending by category.
Related: Here’s how a high school teacher became a millionaire before age 38
Once you’ve tracked your spending for a few weeks or months you’ll begin to develop a complete snapshot of your spending, warts and all. Perhaps you didn’t realize that your family spent over $1000 eating out every month or that you paid $70 a month in late fees.
Once you have this snapshot and know where your money is going, you can move on to the next step by creating a budget to tell your money where it should go. More on that next week.
BMWK, do you track your spending?