This 5-minute habit could transform your finances in 2025 — here are 3 ways it can set you up for better financial health in the new year

Whenever you want to make a major change in your life and create a plan of action, it starts by taking a full (and honest) accounting of where you stand right now. In the case of your finances, that means understanding your income and expenses.

For most people, income is easy. Expenses, on the other hand, are often underestimated. Once you start adding up how much you spent on take-out over the course of a year, the results may surprise you — and not in a good way.

The five-minute habit

When CNBC Make It asked Certified Financial Planners (CFPs) to name the No. 1 way to improve your finances in only five minutes, many said you need to know where your money is going. And that means keeping track of how much you spend.

Tracking your expenses is helpful for many aspects of financial planning—and yet it takes only minutes a day. This is especially the case if you use an app that tracks expenses directly from your accounts, saving you the trouble of continuously inputting. There are plenty of apps to choose from, but you can also check if your bank offers a budgeting app or tool.

Here are three benefits of tracking your expenses:

1. You’ll be better at budgeting

Once you’re tracking your expenses, you’ll probably find it easier to undertake one of the other foundational steps for sound financial management: creating a budget. While there are several approaches to budgeting, they all benefit from having a detailed account of your expenses. And, if you use a budgeting app, it can let you know whether you’re on track in each category (such as food, gas and entertainment).

2. Identify overspending

Tracking expenses can help you find areas where you could cut your spending and save for your goals. For example, in 2023, American households spent an average of $3,933 on dining out and $3,635 on entertainment, according to the U.S. Bureau of Labor Statistics (BLS).

And, while you’re likely aware how much your car lease or loan costs each month, it’s easy to lose track of how much you’re spending on gas, which costs household an average of $2,449 per year. Repairs and maintenance add, on average, another $975.

Few of us would be happy giving up restaurants, entertainment and driving, but they account for 3.9%, 3.6% and 3.3%, respectively, of average annual income before taxes. So if you find you’re spending considerably more than this, you may want to make some adjustments. And, if you’re looking for extra savings, these are areas where you could potentially cut your spending.

3. You’ll have a clearer picture of your retirement needs

A popular rule of thumb says you should expect to spend 80% of your pre-retirement annual income each year in retirement. Tracking expenses is also helpful for retirement planning. If you want to know if you’re saving enough for the future, you'll need to know how much you’re spending and how much of your nest egg you’ll need to withdraw each month in retirement.

As you approach retirement, having a record of your monthly expenses can help you come up with a retirement budget, which will likely involve some tweaks. For example, when you retire and you’re no longer commuting and buying lunch at work, your transportation and food costs should decrease. But you may need to factor in other expenses, such as travel and healthcare.

Sometimes it’s the simplest habits that can yield the greatest results. By spending a few minutes a day tracking your expenses, you can set yourself up for better financial health — in 2025 and beyond.