Mind Your Decisions

Know Your Spending

A fool and his money are soon parted.

When people ask me how they can improve their spending habits, I start by asking them some questions. How much did you spend on gifts last year? What percentage of your income do you spend on gas? Most people give some answers, but then admit that they are not exactly sure. Occasionally, a person gives me a defensive answer that the questions do not matter because “I know where my money is going.” I can’t fully dispute that claim, but I am skeptical. If you cannot quantify two major discretionary expenses, do you really know where your money is going?

The truth is, without proper analysis, most of us have only a vague sense of where our money goes. As I wrote in my post about one way to calculate a tip, most of us are not human calculators.

If you’re not convinced about tracking expenses, I explain a couple major benefits below. It is not hard to track expenses nor is it time consuming (it takes me less than five minutes a day). If you are ready to start tracking, skip ahead to the section on the ways to track expenses.

The Benefits of Tracking Expenses

The first benefit is that you can tell whether you are saving money or going into debt and by how much. This is a more profound benefit than it sounds. I know people with three or four main accounts (bank/investment/savings) with all sorts of electronic transfers, so it is hard to interpret changing balances each month (was the change due to a transfer or a spending change or a downturn in the market?). Plus, even if you are saving, you might not be saving enough to account for a big expense like a down payment or a wedding. Having a quantified account helps you know your financial state and allows you to plan accordingly.

The second benefit is that tracking expenses can help you improve spending habits. After one month of tracking my expenses, I was able to cut 25% of my spending. Strangely, I didn’t miss what I cut out. What happened was that I spent my money more consciously. For example, instead of spending $40 to attend a baseball game, I found that I could have similar fun watching the game at a bar where I spent $10 on a couple of beers. After making similar cuts in my spending, I could use the 25% I saved to fund my Roth IRA and other investments. The specifics of my example are not too important; the main point is that I was better spending my money since I considered trade-offs and opportunity costs more accurately.

Ways to Track Expenses

There are many ways to track expenses and you can pick one that suits your taste. I find that it was easiest to build an Excel spreadsheet to track every thing. There are other ways that are more automated, like Microsoft Money or Quicken. And then there are newer online automatic services like Wesabe. It doesn’t particularly matter which method you choose: just so long as you do it diligently. I’ll go through some of the methods to help you decide what might work for you.

1. Do it Yourself

This is the method I use. There is no software cost and I’m entirely free to modify the design.

Implementation is simple. I carefully collect my receipts each day and then input them into the spreadsheet. This takes less than five minutes a day. At the end of the month, formulas add up what I spent and compare it to my take-home pay. If you want to get fancy, you can add categories and automatic graphs.

I’m revising the file that I use to make it more intuitive, but if you would like a copy when it is ready, please send me a line.

I uploaded a file for use; find it at with my Financial Tools

2. Money and Quicken

If you want a more automated structure, consider Microsoft Money or Quicken. In these programs, you can directly download data from your bank account and credit cards so you can keep track of money. You still have to download data from the websites, but you avoid writing each expense.

The programs also automatically categorize expenses (with varying degrees of success) and can generate graphs. I know a few people who are happy with these programs. There are various versions of these programs, costing from $20 to $100, so in general, they are very affordable.

3. Wesabe

The internet revolution continues! You can now track your expenses online for free using Wesabe, an online community/financial service. Wesabe works by tracking your expenses and and giving you personalized financial information automatically. For instance, if you spend money at the store Trader Joe’s, Wesabe would lead you to user posted answers and articles about how to save money at that store.

Like Money or Quicken, you need to give Wesabe the data from your various financial accounts. Wesabe claims its security is as good as or better than that used on many financial websites. I personally don’t know any one who has used Wesabe, so I can’t speak about its security or features, but it certainly seems like a useful tool.

Some (obvious) suggestions

1. If you buy some thing on credit, don’t double count by inputting the amount on your receipt AND the line item on your credit card bill.

2. Your expenses will fluctuate monthly. You can get a good picture by averaging a few months.

3. Don’t cheat yourself. That $5 you spent on coffee counts equally as a bigger expense like the $100 you spent on clothes.

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