Among the most common pieces of advice that we may offer clients, particularly those engaging in a new financial plan or even a plan update, is to track expenses. In fact, we usually mention it more than once.
For us, having an accurate idea of you spend in a year allows us to create more accurate projections for your cash-flows, and that accuracy means that there may be better and more targeted recommendations for your situation. Essentially, by helping us you are helping yourself.
While tracking your expenses sounds like an onerous process, and it certainly can be. However, there are ways to track your expenses without needing to dedicate a whole day to it.
Automating your expense tracking:
One of the more popular methods involves utilizing some sort of software which captures transactions and then categorizes them for you. Software such as Quicken and Mint are popular for this, and a one and done solution can be very appealing.
For some, this is enough. With many standard situations where money is coming from effectively one source or credit cards, then setting up the software to capture money going to and from those sources is more than adequate.
For others, it does not quite capture the whole picture. In particular for those beginning to consider retirement and especially those who own business and are looking to step back. When you are looking at money being spent from your personal finances and money being spent from business finances for personal reasons, not everything is going to be accurately recorded. This often includes:
- The cost of health/dental/vision insurance
- Transportation costs
- Some life insurance premiums
- Disability insurance premiums
- Cell phones
- Internet provider services
Depending on how deeply your personal and professional life are entwined there may be even more items that are missed. Once you retire these former business expenses, now become personal expenses and that difference for some can be quite significant.
So how can we be reasonably sure that we are capturing all the information available?
It may require doing the work manually for a period of time. This, however, may not be as difficult as it sounds at first. While it’s all well and good to track AND categorize your expenses, for our purposes (and most likely for your own as well) the categorization will likely not be necessary. We prefer instead to start with something more basic.
Each month review your bank statements. From that total all of your withdrawals from cash, checks and electronic transfers. And effectively, that’s it. It gets moderately more complicated with when there are business covered expenses, because then you need to add in any costs that the business covers for you personally. However, it still gets added into the one number and that is your cost of living for one month.
If you do this consistently each month, then you don’t necessarily need to dedicate an entire day to the task. The less frequently you record your expenses though, the more time it will take when you do get around to it.
So, what do you do with that information once you have it?
We often suggest our clients send it to us on a periodic basis, either monthly or quarterly so that we can incorporate it into your next meeting. For yourself, these numbers are good to reference. Seeing what you spend and how it changes over time often gives you more control over your finances by being able to respond and take corrective measures in almost real time. Many people when seeing a spike in their monthly spending for one or more months will take steps to moderate their spending in the following months to maintain an average annual spending.
When do you need to categorize your spending?
For most, the one number a month is all we need to get a good idea of what you spend. Unfortunately, sometimes what you are consistently spending poses a threat to your ability to sustain your lifestyle beyond a number of years.
When you begin spending well beyond your means, we might suggest a more in-depth look at your spending and that is done through categorizing.
Our key goal is to isolate what you NEED to spend with what you WANT to spend or required expenses versus discretionary expenses. When it comes to moderating your lifestyle costs, we often want to start with your discretionary expenses.
You may find when tracking your expenses that you are carrying credit card debt and paying high interest, or that you have both a large grocery bill and still go out to eat every day. You may be spending a lot on entertainment or engage in frequent bouts of retail therapy. Whatever it is, these are often the areas we first suggest making some changes to.
Often seeing these things yourself, especially after totaling them, can drive home that changes need to be made better than any graph we show you that may say the same. This is why it is so important to engage in your own expense tracking rather than automating or having some else do it.
There are some occasions when the recreational spending may be under control, but your required spending exceeds your means. At that point, we are often required to engage in further discussions about what options may be available to you.
Expense tracking is an exercise we recommend to everyone, whether you appear to be in good shape or otherwise. Having access to consistent and accurately recorded information helps us to do what we do better. Perhaps more importantly, it helps you to internalize what you spend and what that means for you in the long run. If your interested in learning more about expense tracking and cash-flow planning, please contact our office. We are happy to help!
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