Most people have no idea how much money they spend in a given month. Even worse, some people do not even want to know because their spending is out of control. But no matter how much you make, if you can’t control your spending you’ll never be able to save money, acquire wealth, or retire early. The number of professional sports athletes with multi-million dollar salaries who declare bankruptcy is proof of this.
Why track expenses
I started tracking every penny we spent a few years before we retired. I had two specific reasons:
- To optimize our spending. I could see in what categories we were spending our money and then we could make an informed decision about where we could cut costs. In retirement, I also want to make sure that we aren’t being too frugal and that we don’t underspend our budget.
- To develop an accurate retirement budget based on actual spending. We couldn’t retire until we knew that our investment portfolio would support our budget. Financial advisors often use a rule of thumb that you should aim to replace 70-80% of your income in retirement but this can be wildly inaccurate for the frugal. Based on our actual spending, we developed a retirement budget that is less than a quarter of our gross income while we were working.
Controlling spending is the single most important thing you can do to improve your financial status. It’s even more important than having a high-paying job.
How I track expenses
I simply get receipts for everything I purchase and enter the information manually into a spreadsheet. If I don’t get a receipt, I write myself a note/email on my phone so I remember to enter it later.
In my spreadsheet, I have one sheet for transactions:
I then summarize the transactions by month and category:
I generally use cash basis accounting where I record the date of the expense when I actually pay for it (I charge it to my credit card or the cash leaves my wallet). The only exceptions are for housing and travel where we may pay for expenses far in advance.
If you are not comfortable with spreadsheets, or prefer a little more help, there are lots of alternatives but here are three commonly recommended options:
- Quicken is a personal finance program created by Intuit. It can download your credit card statements and automatically categorize them.
- YNAB (You Need a Budget). I have not personally used YNAB but it gets very good reviews from users. YNAB has a 34 day free trial.
- Mint is an online personal finance software similar to Quicken (and also owned by Intuit). However, I would never use Mint as they require access to your financial accounts and I’m not comfortable giving up passwords.
Although it’s a little more work, I prefer using a spreadsheet as it gives me complete control over my expense data. I can make whatever summaries or graphs I would like and the data is always easily exportable. However, the most important thing is to pick a method that you can stick with for the long term. You can also minimize the amount of leakage (spending not accounted for) — it’s very easy to miss small cash purchases.
What Categories Should I use to track spending
Below is our current list of categories we use to track expenses. In general, I would start simple and then expand if needed.
Clothes Dry Cleaning
Medical Out of Pocket
Utility Phone Land Line
Utility Cell Kara
Utility Cell Stephen
You’ll notice there are some things that we exclude from our expense tracking spreadsheet:
- Savings – this might be useful to track if you want to reconcile your expenses with your income. We’ve never felt the need for this but it’s not a bad idea.
- Taxes – we haven’t tracked taxes (income/property) closely because we expected them to change drastically (i.e. drop) once we retired. Thus knowing our historical taxes paid would not be useful in retirement planning. However now that we are retired, we may start tracking them once our tax burden stabilizes.
- International Vacations – these tend to be costly and we reserve funds for these separately. While working, we only had limited vacation time and went on an international trip perhaps every other year.
- Investing Expenses – I think this is very important to minimize these expenses and I track the total expense ratio of my investments (mainly ETFs and index funds) separately.
If you want to stop living paycheck to paycheck, reduce your spending, or retire early, tracking your expenditures is a must. Once you get in the habit, it is very easy to do. For us, it was a key part of meeting our early retirement goal.