Dear diary, today we’re going to learn about the benefits of keeping track of spending habits. There’s only one way to grow and maintain wealth: spending less than you make. Easier said than done sometimes. But focusing on that principle will bring you far more financial good than bad.
There are dozens of ways to keep track of finances, with online banking and budgeting apps being the most popular option. And if those seem to work great for you, then stick with them. But for teens that prefer a more timeless approach to banking or those that aren’t too into cell phone apps, then there is another option. It’s called a money diary, and the principle it represents is the difference between financial freedom and anything less.
Here’s everything you need to know about money diaries.
What is a Money Diary?
A money diary is a notebook in which you write all of your spending, typically over the course of a month.
Why Keeping Track of Your Money is Important
Keeping track of your money is important because if you don’t, then you’ll lose money and probably end up broke. Tracking your money ties into the overall idea of budgeting which is what you do when you’re paying monthly bills, saving, and buying something for yourself. That said, tracking your outgoing funds is essential to any budget. And not just because your bank account may be low – although that’s obviously a big stressor. When you apply for a car loan, credit card, mortgage, and more, the bank considers your debt-to-income ratio, also called DTI. The lower your DTI, the better your odds of approval. Imagine you’re a lender, and someone comes to take out a loan. As you review their finances, you realize they make 3,000 a month, but their bills and expenses total 2800 a month (Yikes!). When you do the math for the loan, you realize that the monthly payments are 250. That means they literally can’t afford to pay you.
That’s why DTI is such a big factor, the scenario above may be a bit extreme, but it should give you a good idea as to how DTI works. Here are a few other reasons tracking your spending is essential.
Financial emergencies can change a life. That’s a fact. If your savings are low and a large expense comes out of the blue, like a car bill, medical emergency, etc., you’ll either go broke paying it or overextend your credit and lose future income to interest charges.
Running into financial emergencies is a guarantee. Being able to pay for them makes your life a little less stressful.
Quality of Life
If you don’t keep track of your money, then eventually, you won’t be able to pay for activities with your friends, go out on dates, or move out after high school. Plus, you’ll miss out on concerts, transportation, and much more without good money habits when you enter adulthood. The age-old saying is that money won’t make you happy. We won’t argue the merits of that. But we will say that having money makes day-to-day life that much easier.
How to Keep a Money Diary
Keeping a money diary, like finances in general, is more about consistency than anything else. Since the point of a money diary is to track your expenses and eventually build a budget, missing days can skew your numbers. You can use a regular journal or composition notebook, but the best option is a calendar journal.
To keep track, you can either take the notebook with you while out and about or save receipts from transactions. At the end of the month, split your purchases into three categories; Needs, Wants, and Unexpected Expenses. Needs include things like bills, although you might not have many of those. Needs also include food, travel, and anything else you need to live. (But don’t be dramatic, you don’t need that new jacket to live.)
Wants include anything that isn’t needed, like how you want that new jacket. And unexpected costs are exactly that, purchases you didn’t expect to make.
Once you’ve categorized your expenses, it’s time to make a budget. It’s best to have a goal in mind, whether it’s something you’re saving to buy, to save, etc. The best place to start is Needs.
The costs of some needs aren’t set – for example, when you’re an adult that pays the power bill, you’ll find turning off the lights saves you money. As a teen, a bill that can fluctuate is food expenses. Check your needs and figure out which ones you can save money on.
Wants are a little bit trickier because there’s a fine line between saving money and saving your mental health. For example, let’s say you play sports, and your best pair of sneakers/cleats get ruined one day. You’d save money by not buying a new pair, but you’d be pretty miserable running around in ruined gear. It’s up to your judgment to figure out which of your wants are actually worth the money you put into them. Just try not to justify everything to avoid cutting anything.
There’s a second option to getting rid of an expense entirely. Chances are you can find a cheaper alternative. If you eat a particular food, try making it home or buying it off-brand. The same is especially true for clothing, as most name brands are marked up far more than they’re actually worth.
That said, an important exception to that rule is anything to do with your safety and well-being. For example, sports pads, helmets, etc. Do your research on alternatives to make sure you’re not compromising your safety. Also, remember not to go too cheap on certain items as they’ll break sooner, and you’ll lose money buying replacements. Remember that quality is an essential thing to consider when purchasing or investing in anything.
Now that you’ve figured out what expenses to get rid of and how to do it, it’s time to put your plan into action. After a month, review your spending and see how much money you’ve saved.
It’s perfectly fine if your savings miss the mark a little the first time around. Try again, but if it continues not to work, then it’s time to find out why. One big reason people don’t save as much money as they thought when they get rid of an expense is that they spend more on something else. For example, imagine you have a $50.00 bill that you suddenly don’t have to pay. As a treat, you buy something that costs $35.00. Next, you spend $5.00 dollars on bus fare to get back from the store. In reality, you have $10.00 left, but in your head, you’ve saved $50.00 dollars.
That’s why money diaries are important. Putting your spending to paper helps you get a better grasp of how much money is in your account at any given time.
Money Diary Templates to Get You Started
Here are a few basic money diary templates to get you started.
The Federal Deposit Insurance Company, also known as FDIC, is a major player in US Finance. The FDIC insures the balance in your account for up to $250,000 per account. All federally regulated banks and credit unions have FDIC insurance. That’s why we recommend the FDIC Money Diary template. It’s simple and perfect for people who just want to try having a money diary before committing to it.
The Office Expense template is a downloadable format for Microsoft Word. It can be edited to include more detail and a little personality.
It’s never too early to start being money conscious. In fact, the earlier, the better. A money diary is a great way to appease your timeless pencil and paper sensibilities. And it’s great for those of us who don’t really vibe with electronics too much. No matter the reason, a money diary is simple, easy, and perfect for teens!