Trying to be smart with my credit cards I discovered, that I don’t have a credit card that covers “gas” nicely: all my cards don’t provide good cashback for the gas. A quick search revealed, that all the cards with substantial gas cashback have annual payment. To understand if it’s worth paid for the card, I needed to know how much I payed for the gas last year.
What is the problem?
Sounds easy? Well, it’s not.
- I didn’t have a dedicated credit card for the gas before, I use all possible payment mechanisms: credit cards (closed one as well), debit cards, checks, business cards, cash… You imagine.
- I suspected, there can be some seasonal pattern in this spending (I live in New Jersey, and often drive to the beach in summer). And just to give you a tip: humans are very bad at estimating, I don’t pretend to be the happy exception.
The bottom line: any data I could get (card reports) are inconsistent and in-comprehensive: in other words, not reliable for making this financial decision. And I prefer not to pay if I’m not sure if it’s worth it. But this exercise revealed another problem: I don’t know what I spend my money on.
In general, when we think about savings, investments, funds we think about big sums: you could get a bonus, heritage, or win a lottery to deal with big sums at once… But until this happens your financial health is determined by how you use the money you have (your payroll or other income).
The textbook budgeting starts with understanding how you spend money and later proceeding to decisions what you need to change there. So the fact I didn’t do it (while being proud to be smart with money) was an eye-opener for me… Well, there was room for improvements.
Expense classifications
First I analyzed the types of expenses I have.
You constantly paying for something. But not all expenses are the same, if you think about them, there are pretty many classifications you can use. To name a few:
- Predictability (fixed, which you can plan exactly; predictable when you can see some range; and completely unpredictable)
- Time-bound or movable (some bills you need to pay by a defined date within a month, others can be easily postponed several months)
- Necessity (at least you can think about “must be paid”, “nice to have” and “can be easily avoided”)
- Periodicity (monthly, quarterly, once per year, once per life – and any other imaginable frequencies)
- Expenses vs. savings (in most cases if you move money for saving, the transaction is considered as spending by your financial services)
- and so on
So now you can see the question about the classification is not so trivial. And for sure the classification cannot be a cookie-cutter for everybody. I have chosen my classification based on 2 dimensions: necessity and flexibility. Here how it works:
| Fixed | Flexible | |
| Must monthly | Monthly bills rent/mortgage, subscriptions, car lease, payments in installments, etc. You know exactly that you are going to pay it (and even know on which date of a month) | Monthly expenses groceries, gas, child care, etc. You have to pay this expense, but the sums can vary from month to month. |
| Must periodic | Planned expenses holiday gifts, annual insurance, taxes, etc. You can predict what amount you will need, and they will happen for sure. | Punches healthcare, repairing, etc. They don’t happen on regular basis, but you really must pay for them. |
| Desired | Saving building wealth, it could include a car and real estate if you treat them as investment This is the category you would like to increase on all the costs, and this is the handbook basis for financial security. | Lifestyle all these dining out, jewelry, hobby, a fancy house, and a sport car Honestly, you can live without it, but these are the things that make your life enjoyable right now. |
| Non-desired | Undesired obligations unoptimized subscriptions, bad debt You are not supposed to pay for it, but for some reason you do… | Silly things All the impulsive purchases you regret after |
Which categories exactly you put into each bucket can differ greatly. You can go as granular or as generic as you wish. However, there is a useful rule of thumb: it makes sense to define a category if you know, that you can work within the category to change your money behavior.
In my example (referring to my initial question), “Gas” is a separate category, while for others it can be a part of the “Car” category.
Categorizing helps track the expenses. I usually use water analogy for explanation: imagine your income as a river flowing into a lake (your current net worth), and your expenses are the streams flowing out of the lake. Some of them have consistent flow (and you need to measure it only once to predict), others are like raging streams, and others are like geysers (rare, but strong).
How to track?
There are some ways I tried to track the expenses:
- Manual tracking. Old-fashioned spreadsheets are still in trend.
Cons: very time consuming and requiring meticulousness - Free budget applications. Get all your transactions in one place.
Cons: limited ability to customize, a lot of bugs (errors), hard to fix erroneous items; while sometimes they are good for tracking (past), they have a lot of flaws for budgeting (future) - Paid budget applications. They are awesome, really. After torturing of free apps, you can see the difference. They do most of the hard work for you: tracking all transactions, classifying, ask you for verification.
Cons: the price of the subscription.
The accurate tracking of your expenses is the first step in budgeting (and in savings, investing, and all other advanced applications). So start tracking them any ways it fits you.
Katty's Wallet 
[…] the Tracking Expenses post, I introduced my expense classification. In reality, it’s not the classification I started […]
LikeLike
[…] the expenses into a structure meant for you (for example, see my post on Tracking Expenses) and set up your baselines for all the categories. For the baseline setting, you also can look […]
LikeLike