A big reason why you should track your expenses–money flows are complex

Most of the people I discuss money with track their expenses or agree it is a good idea. But not everyone is convinced. Here is a comment I received earlier this week:

Presh, I sort of see your point about tracking expenses, but isn’t it overkill? I seem to do just fine by checking my account balances every week.

I’ll admit the reader raises a good point. I am not so rigid as to think tracking expenses is the only way to achieve money success.

On the other hand, I think it is unwise to rely on estimation and gut feeling. The fact is that individual money flows are complex. It is fairly easy to lose track of where everything is going–even to the point of losing track of savings. Here’s an illustration of why.

An example of money flows

I asked the reader who used guesswork to explain a little more about their situation. The reader was a recent college graduate and consequently had relatively simple finances. The reader was in a single-income household, with one checking account, one brokerage account, and a few credit cards.

But even then the money flows got complex. To give you can idea, here is a partial list of the money flows during a typical month (click for larger image):

And even worse these flows take place at irregular intervals–how are you supposed to pin down savings with all that is going on?

The lesson: get tracking

Compounding the problem is that money flows get more complicated as one gets older. Multiple accounts, additional insurance requirements, dependents, and multiple income streams can add many levels of complexity.

The only way to be sure of everything is by carefully accounting for expenses. There are many ways you can go about this. You can buy software like Money or Quicken, sign up for things like Mint.com or Wesabe, or use my spreadsheet to track your expenses (see financial tools)–it doesn’t really matter what you do as each method can do the job.

So while tracking may be overkill, I think it is better than the alternative of using guesswork for a complex system.