We are a week into the new year. It's alarming how quickly time flies by, isn't it?
The beginning of a new calendar year is a great time to start tracking your personal finances carefully (though there's never a bad time to start!) Tracking your finances starting now will not only help you to get a grip on where your money is going, but also it will make next year's taxes a lot easier.
Sure, it's past the first of the year now, but not that far past. The records you'll need to catch up on are very reasonable — not unlike what you might do normally.
What expenses should be tracked?
In short, everything, until you have really good reason not to. (I haven't found that really good reason yet myself!)
Tracking every cent that comes in and goes out has advantages:
- The problem spots in your spending become clear. Didn't know that you were dropping $150 per month on coffee? Well, now you do.
- Fraudulent charges are caught more quickly. Looking at credit card charges every few days makes it far easier to catch a purchase that you didn't make.
- You can file your taxes with confidence. You have the documentation to back up the deductions and credits you're claiming.
Which categories of expenses are good ones to track by?
Now, it is possible to be too granular in how you track your expenses. A “toothpaste” category and a “deodorant” category are overboard.
At the same time, though, if your “Other” category is all-inclusive, that won't do you much good, either.
Some distinctions are close calls. It's a matter of taste whether you want to divide up every Walmart receipt into food and non-food items. We just have one category called “Food/Household” that includes both carrots and shampoo.
Some categories can be especially helpful at tax time (not an all-inclusive list but the IRS has the full scoop):
- Charitable donations. These can be deductible if you itemize.
- Any and all taxes. Property tax, sales tax, car tax, real estate tax, etc. may be deductible if you itemize.
- Medical expenses. If you have a lot of them, you may be able to deduct some of them.
- Employee expenses. Such as unreimbursed employee expenses, job hunting, etc. These can be deductible under the right circumstances.
- Business expenses. “Reasonable and customary” expenses in conducting a business or trade are usually deductible to some extent.
- Homeowner expenses. Mortgage interest, home office expenses, home improvement expenses, can also be deductible or may qualify for a tax credit under the right circumstances.
- Education expenses. Some student and teacher expenses can be deductible, or may qualify for credit, under certain circumstances.
- Travel expenses. Mileage can be deductible for certain uses. (If you're not logging miles, start now.)
Divide the categories of expenses as much as you need, but no more. Make it as simple as possible, but not too simple that you miss the value.
How should you track expenses?
How you track expenses is also a matter of taste. Here are some options:
- Pen and notebook. If your expenses are straightforward, this can work just fine!
- Mint. Considered by many to be best of breed in online financial tracking. And free to boot!
- Mvelopes. A computerized version of the cash-based envelope system. We've been using it for the past few months because it's “in your face” with the transactions.
- Quicken. Tried-and-true personal finance tracking software from Intuit. May be a better option if you're not into the cloud yet. We've used this and gotten benefit from it.
- Vertex42 Money Management Template. A freebie with a lot of features. Manual entry of transactions; no sending logins to third parties if such things are concerning.
- Quickbooks. Pull out the big guns and dust off that accounting course you took! Double-entry accounting at its finest.
Whatever way you track your expenses for the coming year, you'll gain the insight of knowing better where your money is going!