Two Questions Everyone Needs to Ask about Their Money

You can't really know where you are going until you know where you have been.

If you want to build wealth and spend money on the things that actually matter, you need to answer two questions:

• Question 1: Where does your money go every month?
• Question 2: Are you happy with the answer to question one?

This article is the fifth entry in the Dollars & Decades series, your guide to making smart financial decisions throughout your life.

Today, we tackle another essential form of money management that should be mastered as a young adult: tracking your spending.

Tracking your spending is a four-step process

1.?? Gather all your bank account statements, credit card statements, and receipts for cash purchases. You’ll need at least 30 days’ worth of expenses.

2.?? Categorize your spending.

3.?? Use either an expense tracking app or a spreadsheet template to list your spending.

4.?? Evaluate where your money is going and use that information to change your saving and spending habits.

Step 1: Gather all your receipts and account statements

The first step to tracking your expenses is to gather the records of all your monthly expenses. There are three places you will find these records:

i.???The monthly statements for all your bank accounts.

ii. The monthly statements for all your credit cards.

iii. Receipts from any cash purchases.

These records will give you all the information you need to track your spending, including the following:

• Date of each purchase.
• Price.
• Details of each transaction, such as the name of the store and the items purchased at the store.

It’s important to remember that you are not only tracking your spending on things you buy, but you are also tracking every penny. That means any fixed costs like rent or insurance and any money put toward paying off debt or saving.

The goal is to know where every penny goes.

Step 2: Create spending categories

Tracking your spending is something that should be done before finalizing your budget. So, creating categories while tracking your spending that fit your budget makes life easier.

If you want to simplify things, people often use three broad categories to categorize their expenses.

1. Needs. This includes the things you can’t avoid spending on, like food, shelter, transportation, and childcare costs, to name a few. If you can’t live without it, categorize it as a “need.”
2. Saving & Debt Repayment. This includes building an emergency fund, retirement savings, and paying off consumer debt like credit cards. If it helps increase your net worth, it should be categorized here.
3. Wants. This covers everything else you spend money on, from clothes and jewelry to travel. If it isn’t something you absolutely must have and isn’t saving or debt repayment, it should be categorized as a “want.”

Step 3: Use an expense tracker app or spreadsheet

If you Google “free expense tracker app” or “free expense tracking spreadsheet,” you will likely find many great options.

If you want something a little different, you can also use the expense tracking spreadsheet I created here.

This spreadsheet has a particularly unique feature: it tells you how many hours you had to work to pay for each expense. Thinking about the true cost of the things you buy in terms of time instead of money might help to clarify if you are happy with where your money is going.

If you want to keep things as simple as possible, you don’t need to use the spreadsheet I created; any generic expense tracker should do the trick.

Step 4: Evaluate where your money is going

Once you have inputted all your spending into your expense tracker, you’ll have a running list of where all your money goes in a given month. You will have answered question 1 posed at the beginning of this article: “Where does your money go every month?”

Most people fail with expense tracking and budgeting because they forget to ask themselves question 2: “Are you happy with the answer to question one?”

Tracking where your money goes is not supposed to be busy work; we aren’t doing this just to create a list of your expenses. You need to look at each line item of spending and ask yourself, “Am I happy I spent money on this?”

• If the answer is yes, then odds are you are pretty happy with the current state of your finances.
• If the answer is no, then it’s time to identify the source of the problem.

If you’re looking for where to easily cut spending, the low-hanging fruit is usually in the “wants” category. Within your “wants,” try and separate spending on things you value and make you happy from “Stuff,” where you’ll typically find mindless impulse purchases and subscriptions for services you don’t use enough to justify the cost.

However, if you want to get serious about saving more money, the odds are that you’ll need to reevaluate how much money you are spending on needs, particularly the “Big 3| expenses of housing, transportation, and food, as they account for the majority of your budget.

The money you save from stuff and the Big 3 can be redirected to things you value, like travel or hitting financial goals like paying off debt or building an emergency fund.

If you’re only spending a fraction of your income on things you value, you are not living an intentional life. The goal should be to align your money with your values as much as possible.

In the next entry of the Dollars & Decade series, I’ll discuss how a budget should be viewed: which is your roadmap for living a happy and wealthy life.

A version of this story was originally published on the Making of a Millionaire Substack, the home of my writing. As a thanks for reading my work, existing readers can get 75% off their first year’s subscription here.

This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any significant financial decisions.