Lately, I’ve been watching the TV show, Till Debt Do Us Part, and a common thread in every episode is that the participants have no clue on how much money they are spending and on what. While I’ve never been deeply in consumer debt, I started becoming smart about our finances only when I began to track our spending.
Tracking your spending helps you with two financial goals that almost everyone has:
- Saving Money: When you start finding out where you are spending your money, it is easy to figure out how you can save money by cutting back or even eliminating spending in some areas. You can concentrate on saving even a little bit on your biggest expense categories, compared to cutting back a lot on smaller expenses.
- Retirement: As tracking expenses becomes a habit, you’ll have a good picture of how much money you need to maintain your lifestyle. Your annual expense run rate is key to guesstimating your number: the amount of money you would need to retire.
It does sound tedious that you have to keep your receipts around and write down everything or input data into your home computer but software such as Microsoft Money or Quicken make the job a lot easier. Personally, I use Microsoft Money and I don’t bother entering every receipt or tracking every little penny we spend. Since we almost always use a credit or debit card, when a statement arrives in the mail, I take a few minutes to balance the account and it is easy to figure out spending categories for most expenses (an entry for Shell is almost certainly Automobile:Gasoline). You’ll have to split expenses manually into categories only for a few places like Costco or Wal-Mart. Once it becomes a regular habit it only takes a few minutes every day and is well worth the trouble.
Bookmark: del.icio.us Digg StumbleUpon
22 responses so far ↓
1 awardtour // Apr 3, 2007 at 12:19 am
Good advise, but I think if someone is already reading this blog then you’re probably preaching to the choir.
Another simple option for tracking your spending is to always use a credit card (which you pay of every month of course) which has online tracking of spending categories. It’s not perfect but it’s nearly as good and a lot less frustrating than Money or Quicken.
And if you don’t mind the privacy concerns, wesabe.com is also a great way to track spending across multiple accounts.
2 Planning Guide 101 // Apr 3, 2007 at 1:34 am
Oh yeah its a good advice.
People who don’t use computer or don’t have much time to do….for them it’s best to keep a notes and write down his/her spending…
Keeping the track of spending is very important.
3 John // Apr 3, 2007 at 8:09 am
DearCC,
How do you keep track of those seemingly inconsequential daily and irregular expenses paid for out of your small change ? E.G. Coffee, breath mints, newspaper,parking, not to mention the sales tax that these expenses incur. It adds up to a significant amount. I didn’t realize the extent of this spending until I started tracking ALL expenses on Quicken. Sure it was a pain, and it certainly seemed a little obsessive. But it became a habit, a 5-munite a night habit…and it paid off.
4 Phil S // Apr 3, 2007 at 8:11 am
I used to use a simple spreadsheet, just like I use to track my investments. But over the years, my income has gone up but my spending habits haven’t changed, so I don’t bother to track it anymore.
Anyways, the point of my post is that I didn’t track my small expenditures, but I did track every time I took cash out of my bank account for small expenditures, since that shows up on my bank statement. I lumped it all together and figured if I took out $300 in cash from the ATM, then I made $300 worth of small expenditures during that month. Everything else shows up on credit card statements and what not. Only if I was a problem spender with my small expenditures would I have to track each individual small expense, but for me, it never got to that level of concern.
These days almost everything goes on the credit card so I can track exactly what I spent and where.
5 Mike // Apr 3, 2007 at 9:10 am
I tend to do the same thing as Phil - don’t sweat the small stuff unless I have to.
One thing I like to do which tells me if I’m saving or not is to look at the difference in my cash position at the beginning of each month. If it goes up $500 - then I saved $500. From that I can tell my TOTAL spending by subtracting my savings from my income. ie if income is $4500 and savings are $500 then I know my total spending was $4k. Then I’ll look at visa and chequeing account and I can get most of the spending details (90%) from there.
6 0xcc // Apr 3, 2007 at 9:10 am
I couldn’t agree more that tracking your expenses is a key step in moving towards financial independence (which can also be called retirement). I think there are actually three reasons tracking expenses is important. First, as you mentioned you may find out there are some areas that you are just spending way too much money in that you didn’t even realise. In the Til Debt Do Us Part series this often comes up as eating out or smoking or clothes. Second, (as you have also mentioned) you get a good idea of what your run rate is and how much it costs on a monthly and yearly basis and even on a multi-year basis (how often do you replace the roof on your house or paint the house or replace your car). Finally, as you track your expenses over the medium to long term (3-5+ years) you start to get a picture of your personal inflation rate. How much more is it costing you every year to maintain your personal lifestyle? If you know your personal inflation number and you know how much it costs to maintain your lifestyle and you know how much income your investments are providing and how much that income grows on an annual basis you know pretty much everything you need to know to achieve financial independence.
7 Canadian Dream // Apr 3, 2007 at 9:48 am
I personally don’t normally track every penny, yet I did last month as a check up(see my blog for details). I think perhaps that isn’t a bad idea for anyone.
Track everything for a while until you get a good budget that reflects your spending. Then stop tracking everything for a year and then do another month to check up on yourself.
Just an idea,
CD
8 Canadian Capitalist // Apr 3, 2007 at 10:25 am
John: Like Phil and Mike, our cash expenses as a % of monthly spending is very low (most weeks I get by with $5 in my wallet), so I just track the cash withdrawals and leave it at that. Of course, your mileage may vary depending on how much cash you spend.
9 brad // Apr 3, 2007 at 11:54 am
Another great thing about using Quicken or MS Money to track everything is all the graphs that show where your money goes, allow you to easily compare income and expense, view the trajectory of your net worth over time, etc.
These graphs become especially useful and indeed motivational the longer you maintain your records. I’ve been using Quicken since the mid 1990s, and looking over my net worth graph or the income and expense reports is almost like reading a diary of my life over the past dozen or so years.
The only bit that doesn’t work so well for me in Quicken is tracking my retirement accounts (IRAs and 401ks in the US, RRSP here in Canada), especially when dividend income is reinvested. I tried keeping those up to date but it’s too much bother to do it all manually, so I just rely on my quarterly statements.
10 Mike // Apr 3, 2007 at 1:39 pm
CC - that’s a good point about how tracking current spending allows for more accurate retirement planning.
Last fall I did some retirement planning and more or less guessed that our basic living costs were about $24k/yr. I started keeping track of spending/savings this year and so far it looks like when I take out non-retirement stuff ie mortgage, our basic spending is about $27k/yr which is in the same ballpark as my original planning.
OXCC - good point about personal inflation - I’d like to try to track this although I suspect it will be difficult. Have you had any luck coming up with any numbers for this? ie can you give us your personal inflation numbers for the last few years?
11 Aleks // Apr 3, 2007 at 2:07 pm
I put just about everything on my Visa (1% cash back is a pretty good incentive) and I keep track of my purchases in a spreadsheet, but I don’t break it down further than that. And instead of budgeting, I just monitor my spreadsheet total and when it starts getting up around my “normal” monthly Visa bill I throttle back the discretionary spending until the next Visa period. I’ll also try to spend less in months when I know I have a major expense, like car insurance or the back-to-school pants and shoe sales.
I could probably save a little more if I was more diligent about budgeting and tracking expenses by category, but I don’t think it’s worth the effort. I’ve saved far more by just increasing my automatic investments whenever I get a raise.
12 Canadian Capitalist // Apr 3, 2007 at 2:49 pm
Mike: I haven’t been successful in figuring out personal inflation because for us it is too much of a bother since there are so many changes in our lives. Since I started tracking expenses, we bought a new house, we made some capital expenses (new roof, new furnace etc. I count them as an expense), we had kids, new job with a longer commute, a new van, lots of international travel in some years etc. Maybe when I have 20 years worth of data, I could figure out expense inflation.
13 Mike // Apr 3, 2007 at 3:50 pm
CC: I’ve had the exact same problems, buying, selling, renovating houses, marriage, kid - all in the last 2 years after being a free spending single guy. So my historical data is pretty useless.
However, I’m hoping things will be more stable in the future so maybe over the next five+ years I might get a sense of personal inflation.
14 GIV // Apr 3, 2007 at 4:08 pm
I also love these myraid debts shows that turn up all over the dial (see my entry on them here) but to me these shows are more enlightening for how they underline how important compatibility is for a couple. It always baffles me that you have couples where one person clearly has no idea or interest in the financial side of things, or one’s a saver and one’s a shopaholic, or worse, where neither one has any interest in family finances. That’s such an obvious red flag to me that I’m stunned when these people end up marrying each other.
But I don’t really focus on the spending/budget side of these shows. I set my own savings targets for myself, as a % of my income. As long as I meet my self-imposed targets for how much money I’m keeping, I don’t really bother with where and how the rest of it is going out the door. I figure, it’s like a treat to myself for saving. If I want to spend the rest on restaurants, or a trip, or 700 lattes or whatever else, that’s my perogative. When you pay yourself first, who cares who’s getting paid second and how much they’re getting?
Works for me for now. But if kids/mortgage etc. comes along I suspect my outlook — and bank balance — will change.
15 Ahmed // Apr 3, 2007 at 4:29 pm
I use MS Money and spend a little time every morning to update my finances. I can’t see my life running without it now. The best feature of this program is the future cash flow chart. MS Money lets you add reoccuring income or expenses. This way I can easily estimate my cash flow for upto 12 months.
I noticed some people concerned about tracking small purchases. Before I got married I had a problem of always using my debit card for purchases and cash withdrawals. The small purcahses ate up my money like crazy. Now, I use MS Money to schedule in my cash allowance after every paycheque. Any small purchases (coffee, chewing gum, etc.) that I personally buy are strictly from cash on-hand. If I have no cash then I can’t buy. Any regular or large purchases are setup through direct payment or we save up for them.
Thanks,
Ahmed
16 Canadian Capitalist // Apr 3, 2007 at 6:08 pm
GIV: As long as financial targets are met, you can (in fact, should) enjoy yourselves. The purpose of tracking expenses is not to make you feel guilty about your treats. Rather, it is to help you make informed decisions about your spending. As an example, when I first started tracking using Money, I found that I was spending a ton of money lunching out (I was paying myself first from my very first paycheck). I decided that I’d rather pack a healthy lunch and only occasionally eat out. I think tracking helps you become a bit smarter about your spending.
17 0xcc // Apr 4, 2007 at 9:18 am
Mike: I have only started to look at personal inflation information for myself and I currently have about 4 years of spending data and the first year wasn’t too detailed so I am sort of waiting to get more data before I do any sort of heavy analysis. I do have some basic numbers on a category by category basis. So for example our spending on food (includes groceries and eating out) increased about 10% from 2003 to 2004 but only 1% from 2004 to 2005. Our spending on utilities went up 30% from 2003 to 2004 but down 12% from 2004 to 2005 (I have no idea why there was such a big increase in 2004, was that a cold winter?) Our car expenses (gas, insurance, maintenance) increased 18% from 2003 to 2004 but decreased 30% from 2004 to 2005, we sold a car in 2004 that required a lot of work to be certified so I think that explains the jump in 2004). Anyway, those numbers are very rough and I haven’t had time to figure out what the peaks and valleys might mean or if there is a good reason for them…
18 brad // Apr 4, 2007 at 9:59 am
I’m not convinced of the value of tracking one’s “personal inflation rate” unless it’s used to detect areas where your spending might be increasing for no good reason. If you’re using it to help you target how much you’ll need for retirement, I’d say its value is very questionable, because the trajectory of your personal inflation rate is unpredictable and not everyone plans to maintain their current spending habits in retirement anyway.
19 j&w // Apr 4, 2007 at 5:01 pm
I gotta tell you, I’m fairly happy with the general state of my finances - never had any education/c.card debt, paying down the mortgage nicely, good savings, six figure income, matched RRSP etc - but I have never, ever been able to sit down and track a day’s, week’s, year’s spending. It’s the most enormous mental block you can imagine. I physically can’t do it.
20 Mike // Apr 4, 2007 at 10:17 pm
Thanks Oxcc for that - feel free to post if you can come up with anything conclusive.
Brad: Unfortunately you are correct. I think there is way too much personal change involved in spending habits (new hobbies etc) and it might not mean anything unless you can track the personal inflation of 100 or 1000 similar couples and maybe draw some conclusions from a larger sample.
However, I rather enjoy playing with numbers and I think it’s a neat idea to try to calculate a personal inflation rate which is why I’m planning to give it a shot. If it doesn’t work then I’ll just default back to my standard 3% inflation when I’m doing my retirement planning. The other thing to keep in mind that any useful personal inflation data doesn’t have to end up as an all-encompassing CPI type number. For example there might be certain categories that I can come up with a personal number for lets say food and property tax. In that case in my retirement planning I can apply my rate to the food & property tax segments and the default rate to the rest of the expenses. I doubt there is any real value in this exercise since a default inflation rate is probably just as good, but like I said, I think it’s a neat idea.
21 Sean // Apr 10, 2007 at 4:23 pm
CIBC has recently built into there online visa account the ability to personally categorizes your expenses to come up with monthly totals. After you create your categories it takes seconds to categorize each item. I use my cc for almost all my purchases especially because of the dividend rebate that CIBC offers. 1% Regular/2% for platinum.
22 Test Driving Spending Profile // Apr 10, 2007 at 11:32 pm
[...] about your finances and your needs are fairly basic, you may want to consider using the website to track your finances. It is very easy to get started, you can access your account from anywhere and best of all, [...]
Leave a Comment