Editor's Note: Options are not suitable for all investors. Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Please see the Characteristics and Risks of Standardized Options.
Over-the-counter (OTC) options are a type of customized derivative not listed on public exchanges. That means they are typically not available for purchase through standard brokerage accounts.
Instead, investors trade OTC contracts directly, between the buyer and the seller, without using a third-party platform.
Key Points
• Over-the-counter (OTC) options are privately traded options that allow for customized terms, unlike public exchange-traded options.
• The primary advantage of OTC options is their ability to be tailored to meet specific goals and needs of the parties involved.
• A significant disadvantage of OTC options is their illiquidity, as they lack a secondary market, making them harder to sell and often more costly.
• Pricing of OTC options depends on factors such as the underlying asset’s volatility, time to expiration, and interest rates.
• Trading OTC options through platforms offers flexibility in terms and conditions but involves higher costs and risks due to lack of standardization and liquidity.
OTC Options Definition
As a quick refresher, options are derivatives that give holders the right to buy or sell stocks or other assets. An options holder holds the right, but not the obligation, to buy or sell the underlying asset at a certain price, on or before a specific date.
While most options trade through brokers via exchanges, over-the-counter options trade privately, between a buyer and a seller. Over the counter options are sometimes tied to an exotic asset — a stock that may not be available for purchase through most brokers’ platforms.
OTC options are not standardized, and allow both parties to define expiration dates and strike prices on their own.This can make them appealing to those with a more complex options trading strategy.
How Does OTC Trading Work?
OTC securities include any types of investments that do not appear on U.S. exchanges. That can include stocks in foreign companies and small or mid-sized domestic companies; it can also include OTC options and futures. Some brokerages do allow investors to trade OTCs on their platforms, though not all do, and there may be additional fees charged by the broker to do so.
With that in mind, if you plan on investing in the OTC market, you may need to do some research beforehand to ensure that the brokerage account allows for OTC trading. SoFi’s options trading platform does not currently support OTC trading.
What is the Difference Between OTC Options and Stock Options?
OTC options and regular old stock options, or listed or exchange-traded options, have some key differentiators worth reviewing. Here is a short rundown of those differences:
OTC Options vs Stock Options
OTC Options
Stock Options
Customized
Standardized
Illiquid
Liquid
No secondary market
Secondary Market
1. Customization
A typical listed stock option is a standardized contract. The exchange, then, is determining expiration dates, strike prices, lot sizes, and other details. By standardizing contracts, exchanges can, as a result, increase the liquidity of the options contract.
Customization is the main and perhaps biggest difference between typical exchange-traded or listed stock options and OTC options. OTC options are customized with the terms hashed out by the involved parties.
2. Liquidity
OTC options are largely illiquid compared to their vanilla cousins. That’s because they’re more or less bespoke contracts — they’ve been customized according to the criteria set forth by the parties involved.
The customizations OTC options come with may not be appealing to many traders and, as a result, may not be quite as easy to sell. In other words, there’s less demand for tailor-made options contracts like those in the OTC market, meaning they’re less liquid, and often more costly.
3. Secondary Markets
Another key difference between vanilla stock options and OTC options is the secondary market — or lack thereof, in the case of OTC options.
Primary markets are where investors buy fresh securities, when they’re first offered. Secondary markets are what most investors engage in when they’re buying or selling securities. These include exchanges such as the New York Stock Exchange.
While the primary market for OTC options is where parties meet to come to terms and develop an options contract, there is no secondary market. In many cases, OTC options can only be closed through an offsetting transaction — a new trade with the original counterparty — that cancels out the existing position.
What are the Risks of Trading OTC Options?
Given the complex and bespoke nature of OTC options, trading them can come with some serious risks. Chief among those risks is the fact that OTC options lack the protection provided by clearinghouses on regulated exchanges, which essentially “guarantees” that the contractual obligations are fulfilled.
That means that typical exchange-traded options are overseen, like other derivatives, by regulating authorities like the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC). The guarantee cements into place that contract buyers can exercise their options, knowing that the counterparty will fulfill their obligation, thus avoiding counterparty risk.
Essentially, a contract is a promise between two parties. If one party decides not to follow through on their end of the deal, when it comes to a traditional stock option, then the exchange will ensure that everything is smoothed out. But OTC options lack that protection from the exchanges.
Pros & Cons of OTC Options Contracts
Like just about every financial tool, instrument, or security out there, OTC options have their benefits and disadvantages.
Pros
The biggest and most obvious advantage to OTC options is that they’re tailored for specific parties. That means that the parties engaged in the options contract get precisely the terms that they want and a contract that fits with their specific goals.
Further, the OTC market allows for trading of both securities and derivatives (like options) for small companies (exotic options) that aren’t listed on the typical exchanges. This provides traders more investment choices, but introduces additional risks.Effectively, the OTC market, and OTC options, provide investors with more investment choices. That can increase the risk — but also the potential rewards — of such securities.
Cons
The drawbacks of OTC options concern the lack of standardization of contracts (which may be a con for some investors), and the illiquid nature of the market. Plus, that illiquidity can add additional costs. And, again, there’s no secondary market for OTC options.
The big thing investors should remember, too, is that there can be a lack of information and transparency in the OTC market. Many OTC securities, including stocks, lack readily available and reliable information. This increases their risk profiles.While with standard options, you can find data and availability through your broker’s portal, such information can be harder to come by for OTC options.
The Takeaway
There are some benefits to trading OTC options, but it requires a thorough understanding of how the market works and the risks that it presents.
While investors are not able to trade OTCs on the SoFi platform at this time, they can buy call and put options to try to gain exposure to exchange-traded stock movements or potentially manage risk.
That said, going over-the-counter can open up a whole new slate of potential investments.
Investors who are ready to try their hand at options trading despite the risks involved, might consider checking out SoFi’s options trading platform offered through SoFi Securities, LLC. The platform’s user-friendly design allows investors to buy put and call options through the mobile app or web platform, and get important metrics like breakeven percentage, maximum profit/loss, and more with the click of a button.
Plus, SoFi offers educational resources — including a step-by-step in-app guide — to help you learn more about options trading. Trading options involves high-risk strategies, and should be undertaken by experienced investors. Currently, investors can not sell options on SoFi Active Invest®.
For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.
Trade options with low fees through SoFi.
🛈 SoFi offers options trading on a user-friendly platform. However, it does not offer OTC options at this time.
FAQ
What is the difference between OTC and exchange options?
OTC options are traded over-the-counter (or, OTC), and may not be available to purchase through some brokerages or platforms. Exchange options, conversely, are traded on exchanges, and should be more widely accessible to investors.
How are OTC options priced?
Several factors influence the price of OTC options, and those could include the volatility of the underlying asset, the time to expiration, and applicable interest rates.
Photo credit: iStock/g-stockstudio
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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes. Claw Promotion: Customer must fund their Active Invest account with at least $50 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.
A foreign currency bank account, also known as a multicurrency account, can facilitate transactions made in foreign currencies; that is, not in U.S. dollars. This can be a significant benefit for businesses. They may use multicurrency (or foreign currency) bank accounts for international transactions as well as to support operations overseas. This can offer a major convenience because of the flexibility with different currencies.
But these multicurrency accounts aren’t just for businesses. Some individuals may also want to fund a bank account with foreign currency in certain situations. Read on for a closer look at what a foreign currency account is, how to open a multicurrency account, and the pros and cons of this type of bank account.
Key Points
• Foreign currency accounts allow holding and sending funds in various currencies.
• These accounts can be useful for individuals who make frequent international transactions.
• Opening an account may require a valid ID, proof of income and employment, and a minimum initial deposit.
• Benefits include avoiding transaction fees and competitive exchange rates.
• Potential drawbacks include fees and high initial and ongoing balance requirements.
🛈 Currently, SoFi does not allow bank accounts to be opened in any currency other than USD.
What Is a Multicurrency Account?
A multicurrency account is a type of bank account that’s designed to hold money denominated in foreign currencies. It may also be referred to as a foreign currency account or borderless account. It is a simpler way to deal with regular deposits of foreign currencies.
The types of currencies accepted for deposit or used for withdrawals can be determined by the bank. Some of the currencies your bank may process include:
• Australian dollars (AUD)
• Canadian dollars (CAD)
• Euros (EUR)
• Great Britain pound sterling (GBP)
• Japanese yen (JPY).
As mentioned, foreign currency accounts can be opened for business or personal reasons. Businesses that operate globally may require these accounts in order to send payments to vendors or receive payments from international clients.
You might open a foreign currency account for yourself, as an individual, in a few different circumstances. Perhaps you live or are working abroad. Or maybe you regularly make payments overseas or need to send money to friends and family internationally.
How Does a Multicurrency Account Work?
With a multicurrency account, you are able to deposit, hold, and send money in different currencies, just as the name implies. Depending on the financial institution, you may be able to earn interest on deposits, as well.
In addition, these accounts may allow you to convert funds back and forth into foreign currencies as needed without paying the usual fees associated with these operations.
A multicurrency bank account that’s set up as a savings account might follow typical savings account rules. For example, the bank may limit you to six withdrawals from the account per month (though these regulations have been loosened since the COVID-19 pandemic; check with your financial institution). If that limit applies and you exceed it, the bank may impose an excess withdrawal fee. Keep in mind that any fees assessed for a foreign currency account may be processed in U.S. dollars.
Multicurrency accounts at Federal Deposit Insurance Corporation (FDIC) member banks enjoy FDIC protection, up to the established limit. The FDIC insures banking customers up to $250,000 per depositor, per financial institution, per ownership category. This may well reassure you about the safety of your funds.
One thing to note is that foreign currency bank accounts aren’t used for forex trading. If you’re interested in trading foreign currency as an investment, you’d need to open a separate brokerage account for that. There are a number of online brokerages that offer the option to trade forex alongside other investments, such as stocks and exchange-traded funds (ETFs).
Typical Requirements to Apply for a Foreign Currency Bank Account
If you’re interested in opening a foreign currency account, it’s important to know what documents you’ll need. That way, you can gather the necessary materials and speed through the application process. The specifics can vary from bank to bank but generally, you must:
• Be of minimum age to open an account, typically 18 or 19
• Have a valid, government-issued form of identification
• Provide identifying information, including your name, address, date of birth and Social Security number
• Meet minimum deposit requirements
• Provide proof of income and employment
The requirements to open a foreign currency account aren’t that different from those for a foreigner opening an account in the U.S. Whether you can apply for a foreign currency bank account online or not will depend on the bank. Some financial institutions allow you to complete the application online, while others require you to open an account over the phone or in-person at a branch. Check with yours to learn the exact protocol.
You may also need to already have at least one other account open with the bank before you can apply for a multicurrency account. If the bank imposes this requirement, you may also need to maintain a specific minimum balance in that account to qualify.
Pros of Foreign Currency Account
If you’re curious about multicurrency accounts, it may well be because you are tangled in some red tape as you try to bank in, say, both U.S. dollars and euros. A foreign currency bank account can help meet certain money management needs, like toggling back and forth between two kinds of currency.
Here, the pros of multicurrency accounts.
• When you deposit funds into your account, you can hold it as multiple currencies, including leftover foreign currency from travel, in one place. You don’t have to exchange foreign currency before you can use it.
• You typically avoid foreign transaction fees you might otherwise incur.
• Being able to switch among different currencies could allow you to leverage the most favorable exchange rates.
• You may be able to earn interest on your balances.
• If the institution where your account is has FDIC insurance, you are covered up to $250,000 per depositor, per insured bank, for each account ownership category, in the rare event of a bank failure.
• Multicurrency bank accounts can be used for personal or business purposes.
• Sending payments or money in foreign currencies can be more convenient.
A foreign currency account could also come in handy if you travel. You can use a linked debit card to make purchases or withdraw cash in each country you visit, without having to get traveler’s checks from your bank.
Cons of Foreign Currency Account
While a multicurrency bank account might be appropriate in some situations, there are a few drawbacks to consider. Specifically:
• Your financial institution might charge you account and minimum balance fees the same as you might pay for any other bank account.
• Initial deposit requirements or minimum balance requirements may be on the higher end.
• Changing currency rates can affect the value of the money in your account.
Another drawback of foreign currency accounts is that not all banks offer them. And some banks may only offer these accounts for businesses, not individuals.
Multicurrency Account Fees
Foreign currency accounts can have fees, just as any other type of bank account may. Depending on the bank, some of the fees you might pay include:
When comparing multicurrency bank accounts, take time to review the details thoroughly. It’s important to understand which currencies you can hold, which fees you might pay, and whether you’re required to maintain a minimum balance in the account.
Once you’ve scoped those details out, see if the benefits of this kind of account will outweigh the fees. It could wind up being a good way to simplify your banking life if your financial life requires frequent foreign transactions.
The Takeaway
Foreign currency accounts can simplify money management if you regularly send or receive money in currencies other than U.S. dollars. Opening one of these multicurrency bank accounts is not that different from opening any other type of account. It can be a major convenience if your daily life involves receiving and/or sending funds overseas — and a good way to take control of your international financial life.
FAQ
What is the purpose of a multicurrency account?
A multicurrency or foreign currency bank account allows you to receive, hold, and send funds in more than one currency. This can be convenient for businesses and individuals who frequently make international transactions and would like to have an account that recognizes multiple currencies.
What types of banks offer multicurrency accounts?
Many but not all banks offer multicurrency accounts. Some of the U.S. banks that offer foreign currency accounts at press time include Citi and HSBC. Some financial technology companies like Wise and Revolut offer digital multicurrency accounts. For businesses, Wells Fargo and PNC offer foreign currency accounts. You can contact your current bank to find out if multicurrency accounts are available.
How does a multicurrency account work?
A multicurrency bank account allows you to deposit, keep, and send funds in more than one currency. You can decide if you keep the funds in different currencies or convert them. This kind of account can help you conduct international transactions without necessarily paying all the usual fees involved.
About the author
Rebecca Lake
Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.
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Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning 3.80% APY, we encourage you to check your APY Details page the day after your Eligible Direct Deposit arrives. If your APY is not showing as 3.80%, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning 3.80% APY from the date you contact SoFi for the rest of the current 30-day Evaluation Period. You will also be eligible for 3.80% APY on future Eligible Direct Deposits, as long as SoFi Bank can validate them.
Deposits that are not from an employer, payroll, or benefits provider or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Eligible Direct Deposit activity. There is no minimum Eligible Direct Deposit amount required to qualify for the stated interest rate. SoFi members with Eligible Direct Deposit are eligible for other SoFi Plus benefits.
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Editor's Note: Options are not suitable for all investors. Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Please see the Characteristics and Risks of Standardized Options.
Bollinger Bands are a popular technical analysis tool that helps traders assess price trends and market volatility. By measuring how far a security’s price moves above or below its average, Bollinger Bands provide insights into whether the price is relatively high or low compared to recent trading activity, indicating whether the security is overbought or oversold.
These bands can be applied to various assets, including options and stocks, making them versatile for different trading strategies. Although Bollinger Bands are often used to spot potential opportunities, they often work best when combined with other indicators to confirm trends and reduce the risk of false signals.
Key Points
• Bollinger Bands are technical analysis tools that measure a security’s price relative to its moving average and volatility.
• The bands consist of three lines: a simple moving average and two standard deviation lines.
• Bollinger Bands help identify overbought or oversold conditions and potential price reversals.
• This tool is more effective when used with other indicators like RSI and MACD.
• Bollinger Bands can be useful for day trading but are not predictive on their own.
What Are Bollinger Bands?
Bollinger Bands are a popular tool used in the technical analysis of securities. They are a set of three bands that measure a security’s relative price in comparison to its moving average and recent price volatility.
The center line is typically the 20-day simple moving average (SMA) of a security’s price, plus plotted lines two standard deviations away from the SMA. The bands are plotted positively and negatively from the SMA, which is what measures the volatility of a security, and the trader can adjust them based on their particular use case. These bands expand during periods of volatility and contract during periods of lower volatility, visually demonstrating market conditions.
Bollinger Bands were created to help investors understand whether a security is currently oversold or overbought, which may help determine whether it is likely to increase or decrease in value over time. When the upper band is close to the SMA, traders may see this as an overbought security. When the lower band is close to the SMA, they may consider the security to be oversold.
The bands, and a set of 22 rules about using them for trading, were developed in the 1980s by John Bollinger, a well-known technical trader.
How Do Bollinger Bands Work?
Bollinger Bands are plotted using two parameters: period and standard deviation.
Period is found by calculating the simple moving average of the security a trader is interested in. The calculation generally uses a 20-day SMA, an average of a security’s closing prices over a 20-day period — or roughly a month of trading days.
The first data point on the graph would be the average of the first 20 days being tracked. The second data point would be the next 20 days, and so on.
That line shows the SMA over time, and the Bollinger Bands are then placed above and below it by calculating the standard deviation of the security’s price along each data point. The standard deviation measures how much a security’s price deviates from its average, reflecting price volatility against its SMA, representing price volatility.
The standard deviation is calculated by first finding the square root of the variance, which is the average of the squared differences of the mean. The standard deviation is typically multiplied by two to create the bands, but traders can adjust this multiplier based on their strategy. The resulting value is then added and subtracted from each SMA data point to form the upper and lower Bollinger Bands.
Key Things to Know About Bollinger Bands
Bollinger Bands adjust dynamically to market conditions, expanding and contracting based on volatility. Here are a few things to keep in mind when using them:
• When volatility is low, the bands get closer together. This contraction reflects a lower volatility period, which may precede future price movements.
• When volatility is high, the bands get farther apart. This indicates that an existing price trend could be coming to a close in the future.
• Generally the security’s price movements stay within the two bands. And once they touch one band they start moving towards the other band. But the price can also bounce off the band multiple times or it can cross over the band. If the price touches one band and crosses the SMA, traders may watch to see if it moves toward the opposite band.
When the price crosses to the outside of the bands, this is a strong indicator of a trend in that direction.
Formula for Bollinger Bands
Below is the formula to plot Bollinger Bands:
BOLU=MA(TP,n)+m∗σ[TP,n]
BOLD=MA(TP,n)−m∗σ[TP,n]
where:
BOLU=Upper Bollinger Band
BOLD=Lower Bollinger Band
MA=Moving average
TP (typical price)=(High+Low+Close)÷3
n = Number of days in smoothing period (typically 20)
m = Number of standard deviations (typically 2)
σ[TP,n]=Standard Deviation over last n periods of TP
Bollinger Bands help traders understand whether a security’s price is relatively high or low so that they might make trades based on trends. Bollinger Bands can indicate uptrends and downtrends as well as possible upcoming price reversals.
Trends with Bollinger Bands can vary based on the asset and trading strategy, lasting anywhere from minutes to years. Traders should understand how to set up the bands based on their timeline. Here are some patterns and indicators traders might want to learn.
Uptrends
Traders can use Bollinger Bands to see whether there is a bullish trend in a security’s market price. If the center line hits the upper band multiple times, this may suggest an uptrend. If the price hits the upper band, decreases but stays above the center line, then hits the upper band again, that is a strong indicator of an uptrend. If the price then hits the lower band, it may indicate a reversal or a loss of strength in the uptrend.
Downtrends
The lower band can indicate a downtrend or an upcoming reversal towards an uptrend. If the price hits the lower band continuously and stays below the center line, this indicates a downtrend. Traders typically avoid making trades during downtrends, but if there is an indicator of a reversal, they might choose to buy.
The Squeeze
When the bands are close together, this is known as a squeeze. The squeeze happens when the security has low volatility, but it indicates that the security will probably have increased volatility in the future. Traders look for high volatility periods to find trading opportunities, so the squeeze reflects decreased volatility and often precedes periods of higher volatility, though it does not predict price direction.
Traders typically like to exit trades during periods of lower volatility, so they look for far-apart bands as a clue that volatility may soon decrease. The squeeze is not used as a trading signal, and doesn’t show whether a security will increase or decrease in value. However, it may help traders figure out the potential timing of upcoming trades.
Breakouts
The SMA line doesn’t always stay between the Bollinger Bands — it can also move above or below the bands. Around 90% of price changes do happen between the bands, so if the price has a breakout above or below the bands it’s a significant event. Breakouts can signal significant price movement outside the bands, however, but they are not reliable predictors of future trends on their own.
Bollinger Band Trading Strategies
Financial analyst Arthur Merrill identified a set of 16 trend patterns, including M patterns and W patterns, that traders can use to recognize potential price reversals. Here are two key patterns.
M Top
The M top pattern indicates that the security price may decrease to a new low. It forms an M pattern at the upper band, where the price nearly hits or hits the upper band but doesn’t cross over it, then decreases to below the low in the center of the M pattern.
W Bottoms
W patterns can be used to identify W bottoms, which is when the second low is lower than the first low but neither low goes below the lower band. If the security rises above the high in the center of the W, this is an indicator that the price will likely reach a new high.
John Bollinger recommended that traders use Bollinger Bands in conjunction with other non-correlated indicators, such as the relative strength indicator (RSI) and the Stochastic Oscillator, in order to gain a comprehensive understanding of the security being assessed.
Although Bollinger Bands help traders understand price volatility and can show opportunities for upcoming trades, they aren’t strong indicators of potential upcoming price movements.
Drawbacks of Bollinger Bands
There are a number of caveats to consider with Bollinger Bands. In particular, they are best used with other stock indicators, to form a fuller picture.
• They show old security price data with equal importance to new data, so data that is outdated may be counted with too much importance.
• They are more of a reactive indicator than a predictive indicator, so they show current market conditions and can indicate trends, but are not strong indicators of what will happen to a security’s price in the future.
• The standard settings of 20-day SMA and two standard deviations is an arbitrary measurement that doesn’t convey relevant information for every security and trading situation, so it’s important that traders understand how to adjust the band calculations for their particular situation.
Using Bollinger Bands for Crypto Trading
Bollinger Bands have become a popular tool for crypto traders to track volatility and trends. They can be used for trading crypto in a similar way to stocks, but some traders choose to use a 28 or 30 SMA instead of 20, to better represent a month of trading days, since the crypto markets are open 24/7.
The Takeaway
Bollinger Bands are a useful tool for technical analysis in options trading, which measure the relative high or low of a security’s price in relation to previous trades over typically the past 20 trading days.
While investors are not able to sell options on SoFi’s options trading platform at this time, they can still employ some of these strategies when they buy call and put options on the platform, whether that’s to try to benefit from stock movements or manage risk.
Investors who are ready to try their hand at options trading despite the risks involved, might consider checking out SoFi’s options trading platform offered through SoFi Securities, LLC. The platform’s user-friendly design allows investors to buy put and call options through the mobile app or web platform, and get important metrics like breakeven percentage, maximum profit/loss, and more with the click of a button.
Plus, SoFi offers educational resources — including a step-by-step in-app guide — to help you learn more about options trading. Trading options involves high-risk strategies, and should be undertaken by experienced investors. Currently, investors can not sell options on SoFi Active Invest®.
Bollinger Bands show how a security’s price moves over time, and whether it’s relatively high or low compared to its recent average. They also help gauge volatility: when the bands are far apart, the price is more volatile. When they’re close together, it’s less volatile.
Are Bollinger Bands good for day trading?
Yes, Bollinger Bands can be helpful for day trading because they show short-term price trends and volatility, helping traders spot potential opportunities for quick trades.
How reliable are Bollinger Bands?
Bollinger Bands are useful for identifying trends and volatility, but they’re not foolproof. They work best when combined with other indicators to confirm signals and reduce false predictions.
What indicator pairs well with Bollinger Bands?
The Relative Strength Index (RSI) and the Moving Average Convergence Divergence (MACD) pair well with Bollinger Bands to confirm trends and spot potential reversals.
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A line item budget is a detailed look at your income and your expenses, and it can help you manage your money more effectively.
Like any type of budget, the purpose of a line item budget is to help you understand how much money you have flowing in and out every month. It also provides the guidelines and guardrails you may need to avoid overspending and hit your savings goals.
If you’re interested in taking a closer look at your money or are sick of running out of cash before the end of the month, this guide to line item budgeting can help.
Key Points
• A line item budget lists income and expenses, providing a simple, organized financial overview.
• Advantages of a line item budget include ease of management, clear financial tracking, and planning for the future.
• Drawbacks of a line item budget include rigidity and the detailed record-keeping required.
• Personal budget categories should reflect individual financial goals and circumstances.
• Income and expenses are tracked line by line, offering a clear view of financial flow.
What Is a Line Item Budget?
A line item budget is a detailed financial plan that lists your income and then breaks down expenses into categories, or “line items.” It allows you to organize your expenses by grouping related costs together on separate lines to create a comprehensive financial picture
A line item budget also enables you to anticipate costs within each expense category, then closely monitor your spending to ensure you stick to your budget and don’t overspend in any specific area.
What Is Considered a Line Item?
A line item is an income or expense category that is part of your budget. For example, if you’re setting up a personal line item budget, your income line items might include salary and a rental property, while your expense line items might include rent, car insurance, and a music subscription.
If you want to make sure you’re putting some money into your savings account each month, you can even include a savings transfer as a line item in your budget.
It may be helpful to know a bit about how these budgets can work in business, as background for creating your own line item budget. Say a business is creating a new advertising campaign. They might consider:
• Projected expenses: How much they think the cost of creating and executing their advertising materials will cost in the future.
• Previous actual expenses: This will show how much in the past their costs actually were for such endeavors.
• Present-year expenses: This would track the actual expenses being incurred as they create their ads. This could be done week by week or month by month.
Why Line Item Budgets Are Commonly Used
Line item budgets are commonly used because they allow you to account for everything that is flowing in and flowing out of your checking account. This makes it easy to monitor spending and compare actual costs with projected amounts and stay on top of your money.
Businesses, nonprofits, and governments tend to favor line item budgets because they allow an organization to easily identify areas where costs are exceeding expectations, track spending across different departments, and make informed decisions about where to allocate funds most effectively.
What Are the Advantages of Using a Line Item Budget?
If you are considering implementing a line item budget, consider these upsides.
Allocating Expenses Is Simple
One of the biggest pros of using this kind of budget is the ease with which they can be created. With just a few clicks on a spreadsheet, you can establish a basic structure and begin to fill in the data that needs to be recorded. And as priorities change, the budget can be changed just as easily to meet those new needs.
Interpreting the Budget Is Easy
Another major advantage of the line item approach: Making a budget this way isn’t only easy to do, it’s also easy to understand. Creating a basic list of categorized income and expenses doesn’t require any specialized accounting degree to decipher. With your phone’s calculator function, you’re good to go.
Planning Your Future Finances
It provides an easy-to-read, at-a-glance view of what to expect from your expenses in a week’s, month’s, or year’s time. And specific amounts are clearly displayed on each individual line. Those looking for budgeting for beginners tips may want to consider a line item budget for these two benefits. This kind of budget can help you avoid those surprise moments of not understanding why your checking account balance got so low.
Providing Clarity for Financial Decisions
Once a line item budget is in place, it can significantly simplify financial decision-making. Rather than wonder how much you can afford to spend on clothing or take-out, you’ll have a pre-decided spending limit. As long as you don’t exceed your targets, you can enjoy your expenditures without guilt — or running up debt.
What Are Some Downsides to Line Item Budgets?
Next, it’s worthwhile to recognize the possible drawbacks of line item budgets.
Best for Those With Predictable Income and Expenses
Line item budgeting usually relies on fixed and steady income and expenses for accuracy. It can work well for managing predictable finances, but if a budget contains line items that fluctuate significantly, it may not balance properly. This can lead to inaccurate calculations.
Typically Rigid
Another disadvantage of line item budgets is that they are rigid. It’s not uncommon to change spending habits throughout the year to fit changing needs, but those changes aren’t automatically reflected in a line item budget.
Spending adjustments may require extensive budget rewrites in order to accurately capture a new spending plan. With a line budget, any time financial goals change, it requires reviewing and adjusting everything line-by-line in order to stay current.
Requiring Detail
Unlike a budget such as the 50/30/20 rule, in which a person wrangles three big financial buckets (or spending categories), a line item budget does require rigorous accounting of specific expenses. This can be challenging for some people.
Budgeting: Is It Worth It?
Budgeting can seem tedious. After a long day (or week) at work, the last thing you may want to do is spend time in front of a screen, plugging in data and recording how much you’ve spent.
But tracking your money can be a powerful exercise. Here are some reasons why budgeting can be worthwhile:
• Tracking your spending can give you direct visibility into your habits and when you understand where your money is going, you can feel empowered to make adjustments.
• Budgeting can be part of a good money mindset. Instead of thinking of budgeting as a series of spending restrictions, you could think of it as a tool you can use. It’s a technique that can give you the freedom to spend money on what is most important to you.
• Setting money goals can provide a structure to help you build out your budget and plan for the future. So, whether you’re saving for retirement, planning a wedding, or jetting off on a trip overseas, having and sticking to a well-crafted budget can help you get there.
• It’s also worth noting that your budget is a living document. It’s okay to make changes. As you adjust your goals or experience or experience changes in your income or lifestyle, you can (and should) make adjustments and changes to fit your new needs. Your life isn’t stagnant, and your budget shouldn’t be either.
Using a Line Item Budget for Personal Finance
Typically, line item budgets are used by small businesses to track their earnings and expenses and compare them from year to year. While businesses typically have different needs than households, creating a line item budget can be helpful in personal finances, too.
Just as they give small businesses insight into opportunities to grow the business or reduce expenses, line item budgets can help individuals manage personal expenses. Outlining each source of income and expense can reveal personal spending habits and opportunities to reduce one’s cash outflow.
The specific insights you gather from a line item budget, as well as the changes you make, will ultimately depend on your personal goals and overall financial situation.
Deciding What to Include in a Line Item Budget
Deciding to create a line item budget is just the first step. Next, consider which categories are most important for you to include. A personal budget is just that — personal.
Everyone’s financial situation is different, so this list is not the end-all-be-all solution, but here are some high-level categories you may want to consider (each will likely include several sub-categories).
Bills and Utilities
This category is fairly self explanatory — after all, everyone’s got bills to pay, right? Things worth listing in this category might include water and electricity bills; cable, internet, or phone bills; or any other monthly bill you have on your expense list.
Debt
If you have student loan payments, credit card bills, or other recurring debt payments, include them in your budget. That’s an important area to track.
Education
If you are currently attending school or have kids, you’ll likely want to consider including things like tuition and fees, the cost of books and other supplies, and any other expenses directly related to education costs.
Entertainment
This one is a little broader and can be highly customized depending on personal spending habits. Do you have subscriptions to streaming services? Do you buy lots of books?
Tickets to the movies, museums, or a concert could also be included in this category. Depending on your hobbies and interests, you may find you can expand this with additional detail.
Fees
Think of all the fees charged to your accounts. Late fee on a delayed credit card payment? ATM fees? Add ՚em here. You could add HOA fees and others to this category as well. If you pay an annual fee to your credit card issuer, that goes here as well. (Seeing how fees add up can be a useful exercise. For instance, if you are paying several fees at a traditional bank, you might opt to switch to an online bank, which typically will charge lower or no fees.)
Food
Depending on your eating habits, you could split this up even further in a line item budget into categories like groceries, snacks, and dining out.
Home
Think of things like your rent or mortgage as well as expenses for maintenance and upkeep of your home.
Income
You’ll probably want to include all sources of income, not just your regular 9-to-5. If you’re budgeting as a couple, you can include income for both partners.
Add your contributions to all investment accounts including a 401(k), IRA, 529 accounts, or other brokerage accounts.
Medical
Expenses for medications, health, dental, or vision insurance, and copays can all be included under this category.
Personal Care
Things like toiletries, vitamins, and beauty supplies would fit into this category. Hair cuts, trips to the nail salon, and massages could be included as well. If desired, you could also include the cost of other self-care practices, like a subscription to a meditation app, gym membership, or exercise classes.
Savings
Money that you put into an emergency fund, vacation fund, or other form of savings should be accounted for in your line item budget, too.
Do you pay for any regular services? You could include things like dry cleaning services, the cost of having a housekeeper, or the fee you pay your babysitter for a night out.
Shopping
Heading to the mall? Shopping expenses like clothing, toys, and even gifts for others, could be added here.
Taxes
If you’re a full-time employee, taxes are automatically being taken out of your paycheck. But if you are a freelancer or independent contractor, note quarterly taxes in your line item budget.
Transportation and Auto
This is a catch-all category for things like your monthly metro pass, gas, car insurance, auto loan payment, and general maintenance of your vehicle (if you own one).
Travel
Add all costs associated with trips you take here. Things like hotels or lodging, air travel, taxis, travel insurance, and tickets and admission for excursions and seeing the sights.
If you’re road-tripping, you could include the cost of gas, tolls, and other car-related expenses for the trip here too. Also worth including is the cost of food while on the road.
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Putting Your Line-Item Budget Together
A list this long can seem overwhelming. Take it one step at a time, and, if needed, break the work up over a few days. For instance:
• On day one, gather all of the relevant documents (tax returns, paychecks, credit card statements, etc.), and create the skeleton of your line item budget.
• On day two, you could aim to make it through recording your income and maybe half of your expenses.
• On day three, you could finish adding data about your expenses and add any finishing touches or edits.
After creating this line item budget, you should have a bird’s-eye view of your spending habits. Take a close look at the information, and decide if you are happy with what you see. Now is the time to be honest with yourself and make the changes you feel are necessary. Do you want more money to put towards savings or paying down debt? See how you might alter the numbers as they currently exist for the months ahead.
Want to make cuts to your monthly expenses? Now you know exactly how much money is being spent in each category and where you could stand to hold back. Some ideas to mull over:
• Can you negotiate less expensive car insurance? Experiment with meal planning to see if you can be intentional about your food spending and potentially cut your grocery bill.
• Try adjusting the thermostat setting while you’re asleep or away from your home to cut your energy bill.
• Getting hit with fees on late payments? You might want to add an alert to your calendar or a monthly notification to your phone to remind you when payments are due. Another possible option is to enroll in autopay so you never miss a payment.
Payment history accounts for 35% of your credit score. So making payments on-time consistently could not only eliminate those pesky late fees from your budget but it could also potentially have a positive impact on your credit profile over time.
To make sure you stay consistent with your line item budget, it’s helpful to choose a specific day each month (ideally at the end) to review your expenses. This is when you gather your statements and receipts and log in actual spending and income numbers for each line item.
You can then compare your actual spending to your planned spending, identify areas of overspending, and make any needed adjustments to your budget for the following month to ensure you’re on track with your financial goals.
It’s also helpful to automate your finances wherever possible. Consider setting up auto pay for regular expenses, as well as a monthly transfer from your checking account to a high-yield savings account for emergencies and other short-term savings goals.
Line Item Budget Example
A line item budget example can be as simple as using an Excel or Google Sheets spreadsheet to make your own basic line item budget template.
At the top rows, income can be added, say, for a given month. Then, moving down the page, you can list out the various expenses you have. To the right of that, you might include “projected” and “actual.” If certain line items tend to always come in over budget, you may need to adjust your budget — or your spending habits.
You can customize the organization to best suit your needs.
Line Item Budget Templates
There are many free resources online that can help you set up your budget. For example, Google Sheets offers free pre-made budget templates, such as an annual budget and a monthly budget, that you can customize to your needs.
Excel also offers free pre-made templates for budgeting that includes line items for different income streams and household expenses, with the ability to add or subtract categories to make it fit your financial situation.
Alternatives to a Line Item Budget
Though simple and intuitive in nature, line item budgets aren’t a perfect fit for everyone. Here’s a look at some other budgeting options you might consider.
50/30/20 Budget
Also known as a proportional budget, the 50/30/20 budget rule focuses on splitting income into three buckets — “needs,” “wants,” and “goals” (savings and debt repayment). Instead of creating lists of expenditures, you instead commit to spending 50% of your income on things you need to spend on (housing, food, debt, and similar “musts”), 30% on things you want (dining out, travel, and so forth), and the remaining 20% is set aside for savings and debt payments beyond the minimum.
Because spending isn’t tracked on a granular level, you might use a budgeting or expense-tracking app to help avoid overspending in any one category. You can use an online 50/30/20 budget calculator to see the breakdown of your money.
Envelope Budgeting Method
The envelope method focuses on using physical envelopes and labeling each with a spending category, such as food, bills, or entertainment. The envelopes are then filled with the maximum amount of money desired to be spent in each category, and spending throughout the month happens directly from those envelopes.
Once an envelope is empty, no more spending can be done in that category, unless taken from another. This method can be adapted to use a debit card vs. cash.
Zero-Based Budget
Similar to the line item budget, the zero-based budget takes account of all income and expenses. The difference is that with this budget, the goal is to make sure that every incoming dollar is allocated to either a saving or a spending purpose, and to leave nothing left over. Automating finances with services like automatic bill-pay and prescheduled bank transfers (say, into a high-yield savings account) can help with managing this style of budgeting.
The Takeaway
Creating a line item budget can be useful when determining your spending habits. It’s a fairly simple, detailed, and well-organized way to track your earnings and spending, but it’s not always flexible. Also, if you don’t have your budget spreadsheet on hand, it could be more difficult to make changes or check in while you’re busy living.
There are many different types of budgets and as well as apps and expense trackers that can simplify money management. A good place to start your journey is seeing what tools your bank offers.
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FAQ
What is an example of a line item budget?
A line item budget is a simple, organized way of listing income and spending in detail so you can keep things in balance and see how you are tracking over time. It can be easily made with a basic spreadsheet template, listing your income, your spending, and your savings in a given time frame, such as one month.
What is the difference between a line item budget and a program budget?
Line item budgets and program budgets are frequently used in business. Typically, a line item budget will list out individual budget expenses, item by item. In a program budget, however, the spending tends to be grouped into smaller budgets for specific activities or programs. For instance, in a program budget, all the costs related to advertising a new service could be kept together, to show the expenses required to meet that goal.
How do I create a line item budget in Excel?
One simple way to make a line item budget in Excel is to create vertical columns for each month. Starting at the top of each month, you could list various sources of income. Then below that, you could break out, line by line, all of your expenses, such as food, housing, utilities, entertainment, clothing, dining out, travel, transportation, and so on, going down the page. This can allow you to tally your earning, spending, and saving.
What tools can help manage a line item budget?
There are a number of online tools and apps that can help you set up and stick with a line item budget. For example, you might start by using spreadsheet software like Microsoft Excel or Google Sheets to set up your budget, either from scratch or using one of their free line item budget templates. To help stay on track, consider downloading a budgeting app to your phone (your bank may offer a free one) that can link to your outside accounts and help you monitor and categorize your spending.
What are the most common mistakes when using a line item budget?
One of the most common mistakes when using a line item budget is failing to update it regularly. Once you set up your expense categories and spending targets, it’s important to enter your actual expenses to see if you’re staying on track with your budget.
Other common errors with line item budgeting include: underestimating expenses, setting unrealistic spending limits, and ignoring small but recurring expenses.
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• Start by looking at past financial statements to understand your average monthly income and fixed monthly costs.
• Categorize expenses into needs, wants, and savings for better financial management.
• Use apps or spreadsheets to track and categorize expenses efficiently.
• Automate payments and savings to build consistent financial habits.
• Review spending monthly to ensure you’re sticking to your budget and working towards long-term goals.
Many people aren’t quite sure where their cash goes. They know they have money flowing in and out but couldn’t tell you the details. If you’re among that group, it can be a good thing to start tracking your monthly expenses.
Why bother? Once you know where your money is going, you can decide if this is actually where you want your money to go. You may find places where you’re wasting money and decide to rejigger your spending so you can put more money towards your goals, whether that’s paying down debt, going on vacation, or being able to retire one day.
If you’re ready to learn how to keep track of expenses, these tips can help.
Check out our Money Management Guide.
This article is from SoFi’s guide on how to manage your money, where you can learn basic money management tips and strategies.
6 Ways to Track Your Monthly Expenses
Getting a handle on your spending is easier than you think. Here’s how.
1. Understanding Your Income and Fixed Costs
To determine how much money is flowing into your checking account each month and exactly where that money is going, you’ll need to gather the last six months’ worth of financial statements.
Use these statements to determine your average monthly income (after taxes are taken out), as well as make a list of your regular, or fixed, expenses (such as rent or mortgage, utilities, and car payments). Next, list out your variable expenses — those change from month to month, such as groceries, gas, and entertainment. This is an area where you might find opportunities to cut back.
2. Categorize Spending and Expenses
Once you have an idea of where your money is currently going, you’ll want to put your expenses into categories. This could be a long detailed list. Or, you might simply divide your expenses into three main buckets: Essential spending (“needs”), nonessential spending (“wants”), and saving and paying down debt (“goals”). This approach is known as the 50/30/20 budget.
Needs
Needs include anything that you have to spend money on to maintain a basic standard of living. Using the 50/30/20 budget, 50% of your budget would go to needs.
Examples of needs include:
• Housing
• Utilities
• Food
• Healthcare
• Insurance
This category can include a mix of fixed and variable expenses. For example, your rent or mortgage payment is likely fixed since you pay the same amount all the time. But your utility bills can be variable if you pay more in winter and summer, but less in spring and fall.
One rule of thumb for housing is to spend no more than 30% of your gross (pre-tax) income on rent. This may not be feasible if you live in a metro area with high housing costs. But if you find housing is taking too big a bite out of your budget, you might consider taking on a roommate or moving to a cheaper area of town.
Wants
Wants are things you spend money on but don’t necessarily need to survive. This section accounts for 30% of spending under the 50/30/20 rule.
Examples of wants in a line-item budget can include:
• New clothes that aren’t really needed
• Travel
• Dining out
• Hobbies and recreation
• Entertainment
• Spa or salon visits.
The wants section of your budget is often where you can make the biggest cuts, since these are things you don’t need to spend money on.
Savings and Debt
The remaining 20% in the 50/30/20 budget is dedicated to saving and paying down debt. You could split it equally, and devote 10% to saving and 10% to debt. Or you might divide it differently if you’re prioritizing one financial goal over another.
Some of the things you might save money for in your budget include:
• Longer-term goals, like the down payment on a house
• A child’s future college education
• Retirement.
Financial experts often recommend saving 10% to 15% of your income for retirement alone, so you might need to re-evaluate how much you’re setting aside for that goal. Increasing 401(k) contributions can help you get closer to that target if you’re not there yet. If you don’t have access to a 401(k), you might want to open an Individual Retirement Account (IRA).
On the debt side of the equation you might have student loans, credit cards, car loans, or other debts. How you choose to pay them down can depend on how much money you have to work with and what’s most important to you. The debt snowball method, for example, can help you pay off debts from smallest balance to highest. Meanwhile, the debt avalanche has you pay off debts based on interest rate, going from highest to lowest.
If you don’t have at least three to six months’ worth of living expenses set aside in an emergency fund, consider making that a priority over other goals. The reason: Without a back-up fund, any financial bumps in the road — say, an expensive car repair, medical emergency, or loss of income — could force you to run up credit card debt that could take months, even years, to get out from under.
Prioritizing monthly expenses means deciding where your money will go first. This might include monthly bills and basic living expenses, along with saving and extra payments on debt. What’s left over after that can go towards your wants.
The more you can automate your finances, generally the more successful you’ll be at budgeting and tracking your money.
Some of the payments you might choose to automate include:
Some of the bill payments you might choose to automate include:
• Mortgage or rent payments
• Utilities
• Cell phone and internet bills
• Car insurance
• Student loan payments
• Credit card bill payments
• Transfers to your emergency fund/other savings
• Retirement contributions.
Benefits of Automation for Financial Success
Here’s a look at some of the benefits of putting a portion of your spending and savings on autopilot:
• Reduces the risk of missing payments and getting hit with late fees and interest charges.
• Helps you build a consistent savings habit without having to remember to transfer money into savings or investment accounts.
• Minimizes the effort required to manage your finances manually.
• Removes funds from immediate reach, helping you avoid the temptation to spend savings on impulse purchases.
4. Set Up a Spreadsheet
To track your monthly expenses, you might set up a simple spreadsheet where you list your income and monthly expenses and set saving targets. You can use the SUM function in a spreadsheet to automatically add values together. At the end of each month, you fill in the data and see how everything lines up.
Key Spreadsheet Templates for Budgeting
If you’d rather not go to the trouble of setting up rows, columns, and formulas, you could simply use a pre-made spreadsheet template.
For example, Google Sheets offers free pre-made budget templates, such as an annual budget and a monthly budget. Or if you have Microsoft 365 software, you can download a free pre-made Excel template for budgeting, such as a monthly budget, personal budget, or household budget.
5. Use an App
If you’d rather not have to turn on your computer and manually enter values, you might prefer using a budgeting app for tracking monthly expenses.
These tools can typically link to your bank and credit card accounts and will periodically pull transaction data from your accounts. This allows you to see how much you’ve spent right on your screen in one simple place; no toggling back and forth.
Some apps even allow you to tag or categorize expenses and create graphs or charts so that you have a visual representation of where your money is going each month.
6. Track Your Money With Your Bank’s Help
Many banks provide built-in expense tracking features within their online banking platforms or apps. These tools can often link to outside accounts, track and categorize your transactions, and offer financial insights that can help stay on top of your budget.
For instance, SoFi can help you to:
• Connect financial accounts in a personal dashboard
• View and track expenses
• Monitor your credit scores
• Create a budget plan
• Track retirement savings and other money goals
• Review your debt situation.
Why Is Tracking Your Spending Important for Financial Management?
Tracking your expenses is essential for managing your money because it provides transparency into your spending habits. After a few months of tracking your spending, you’ll likely have a clear sense of where your money is going. This information can empower you to make better financial decisions moving forward.
How Tracking Supports Long-Term Financial Goals
When you spend haphazardly — and simply hope it will all work in the end— you can end up overspending on things that don’t mean that much to you, while giving short shrift to the things that do, like saving for a home, a child’s college education, or retirement.
It’s generally much easier to start saving for these milestones early, then to try to catch up later. This is due to the magic of compound returns — when the returns on your money get reinvested and earn returns of their own. The earlier you start saving for long-term goals, the more you benefit from compound growth.
How Often Should You Review Your Spending?
It’s a good idea to review your spending at least once a month. This allows you to see how your actual spending and saving amounts line up with your plan, and if you need to rejigger your budget for the next month.
Setting a Routine for Monthly Expense Reviews
To get into a routine for monthly expense reviews, you might choose a specific day each month (ideally at the end) to review your expenses.
If you’re budgeting manually, this is when you would gather your bank/credit card statements and receipts and log in your income and expenses. If you’re using an app, most of this work may already be done for you.
Either way, you’ll want to compare your actual spending to your planned spending, identify areas of overspending, and make any needed adjustments to your budget for the following month to ensure you’re on track with your financial goals.
Avoid Common Spending Tracking Mistakes
When trying to figure out how to keep track of expenses, you may make a mistake or two along the way. Here are two common ones to keep in mind:
Overcomplicating the Process
Using overly detailed tracking methods can be overwhelming and discouraging. It’s typically better to stick to simple and effective systems that fit your lifestyle. For example, if you’re not a spreadsheet person, don’t feel like you have to force yourself to embrace them. You might consider using a budgeting app, or simply pen and paper to stay on top of your budget. The best way to track monthly expenses is the one you’ll stick with.
Ignoring Small Expenses
Small, frequent purchases can add up significantly over time. To make sure day-to-day cash expenses don’t slip through the cracks, you might jot them down in a small notebook (or the notes app on your phone). Alternatively, you could collect your receipts in an envelope. Either way, it’s important to add these expenses to the appropriate spending categories at the end of the month.
Tracking your monthly expenses is an essential part of financial success. Whatever method you choose (pen and paper, a spreadsheet, or an app), it can give you key insights into your spending habits. Once you know where your money is going, you can make informed decisions about how you want to spend and save moving forward.
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FAQ
Why is tracking spending important for financial management?
Tracking spending allows you to see where your money is going, and where you might be overspending (or wasting money), each month. When you track monthly spending regularly, it becomes easier to make a realistic budget so that you can spend and save wisely, as well as work toward other financial goals.
How often should I review my spending?
Ideally, you want to review your spending at least once a month, so you can assess your financial progress and make adjustments as needed. Some people prefer weekly reviews for more real-time tracking, while others do daily check-ins to stay on top of their budget. The key is consistency — frequent reviews help you catch issues early, maintain control over your finances, and ensure you’re sticking to your financial plan.
How can I categorize my expenses to get a better understanding of my spending habits?
One simple way to categorize your expenses is to divide them into three main buckets: needs (rent, utilities, groceries), wants (entertainment, dining out, subscriptions), and goals (savings and debt repayment).
With the 50/30/20 approach to budgeting, you would put 50% of your monthly take-home pay towards needs, 30% towards wants, and 30% towards saving (including retirement) and making debt payments beyond the minimum. Depending on your expenses and goals, however, you might need to decide to tweak these percentages.
What are some common mistakes people make when tracking their spending?
One common mistake people make when they track spending is overcomplicating the process, which can make it harder to stay consistent. Other common errors include: ignoring small expenses, which can add up and lead to inaccurate budgeting; and being inconsistent with tracking, which can result in overlooked wasteful spending or missed opportunities to save more effectively.
How do I track spending if I have irregular income?
It can be tricky to budget and track spending if you have irregular income, but it’s not impossible. One solution is to look back at what you’ve made over the last six months, then divide that number by six to determine your average monthly income. You can then use this number to offset your monthly expenses. Another option is use the lowest amount you earned over the last six months as your monthly income to ensure you don’t overspend.
About the author
Rebecca Lake
Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.
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