Consider a person with the following transactions who just began tracking their finances in June 2017. We use a dummy account in the beginning to give the initial balance on the checking account and credit card. After that, it should never be used again. This simplified hypothetical person has 11 transactions for the month (I average about 100 transactions per month) between the following accounts:
|Wealth containers||Checking account, credit card|
|Spending categories||Groceries, auto, housing|
Joe Hypothetical records the following transactions for the month.
|2017-06-01||Starting balance checking||$3000||dummy||checking account|
|2017-06-01||Starting balance credit card||$200||credit card||dummy|
|2017-06-04||HEB groceries||$150||credit card||groceries|
|2017-06-06||Paid credit card||$350||checking account||credit card|
|2017-06-13||Oil change on car||$45||credit card||auto|
|2017-06-15||Electric bill||$90||credit card||housing|
|2017-06-15||HEB groceries||$170||credit card||groceries|
These transactions can be viewed as expenses or income for the month by category. In future months, Joe Hypothetical will want the totals to sum only the values over the past month.
|2017-06-13||Oil change on car||$45|
|Total over all categories||-$692|
Or they could be viewed as changes in the account balances. In future months, Joe Hypothetical will want to display the transactions over the last month but display a total for the entire history of record-keeping right back to these starting balances.
|2017-06-01||Starting balance checking||$3000|
|2017-06-06||Paid credit card||-$350|
|2017-06-01||Starting balance credit card||-$200|
|2017-06-06||Paid credit card||$350|
|2017-06-13||Oil change on car||-$45|
|Total net worth||$3492|
The point of using software is that it is fairly easy to record the information in the first table but difficult to read anything useful out of it. The software generates the second two tables from the information in the first. There are a lot of ways to do this. It can be programmed in Excel or any real programming language. Mint, Quicken, YouNeedABudget.com, EveryDollar, and many other packages will do this for you. The mechanisms by which you must record the first table vary, some of them require you to manually enter every item, some access your bank account's information to automatically populate the database. They offer different graphing capabilities but they all do the same thing at a basic level.
Tracking of this kind is critical for understanding spending patterns. I have met many people who ought to be able to estimate their expenses (by virtue of their education or claims of financial prowess) but I have never met a single person who could do so accurately without tracking the numbers. It is also important for taxes. If you are paid for any job as an independent contractor, anything related to the job is a tax deduction. If you do not have records like this, you will miss deductions. Even if you are never paid on a 1099 form, there are tax deductions you will miss out on if you do not keep records. Money spent on healthcare is tax-deductible (office visits, parking, prescription medications, etc) but you cannot deduct it if you have no record of it.