Tracking expenses is the first stepstone to budgeting, building wealth, and all other fancy financial applications. But for some reason, it is not an easy transition.
I clearly remember my frustration about 3 months after I started to track my expenses. I was staring at the computer monitor on the neat rows of numbers. The number themselves don’t tell me what to do, where to move. Do I save enough? How can I see the progress? What do I need to work on in terms of money behavior?
In this post, I provide the strategy I eventually follow. It was not a straight path, and I had a lot of tries and fails, but looking back, here is what I would have suggested myself in the very beginning.
The strategy
In the Tracking Expenses post, I introduced my expense classification. In reality, it’s not the classification I started with, but the classification I came to after successful working on my budget and related money behavior. Just to recap, here it is:
| Fixed | Flexible | |
| Must monthly | Monthly bills | Monthly expenses |
| Must periodic | Planned expenses | Punches |
| Desired | Saving | Lifestyle |
| Non-desired | Undesired obligations | Silly things |
The reason why I refer to the classification is the fact, that it helps to set up the strategy, what you must do with your expenses moving forward. Here it is:
| Fixed | Flexible | |
| Must monthly | Monthly bills Strategy: optimize and track. | Monthly expenses Strategy: optimize through changing behavior |
| Must periodic | Planned expenses Strategy: face the truth and plan | Punches Strategy: be ready for them |
| Desired | Saving Strategy: maximize | Lifestyle Strategy: set boundaries and make agreements with yourself |
| Non-desired | Undesired obligations Strategy: get read of them | Silly things Strategy: eliminate or strictly limit |
Step by step plan
The strategy is based on common sense, and it is something we all know subconsciously. But where to start?
I suggest following the step by step plan, which will let you see your progress quickly while keeping you motivated.
Step 1. Get read of undesired obligations
It’s really the easiest step you can do. The undesired obligations appear mainly because we forgot to sign off something. All the subscriptions we don’t use, monthly service signed for… Cancel them right away, and you’ll feel much better immediately.
I also suggest checking “subscription” sections in Play/AppStore, PayPal, or other financial services where there can still be forgotten subscriptions.
Step 2. Optimized monthly bills
While you are working on undesired obligations, it makes sense to optimize your monthly bills as well.
Maybe it’s time to move some of the bills into Undesired obligations? It’s especially true for the services you might not already need. Life changes, circumstances change, and what you actually used the last quarter might not be in need.
Sometimes providers increase the monthly payment after the promo period is over, and you didn’t have time to call, or forgot about it. So pick up the phone right now and call them. You can get a prolonged promo price, you can switch to a competitor or you can cancel the service if you don’t need it.
Also, think through all your items: is there a way to cut or decrease periodic payment? For example, you could pay for insurance not monthly, but bi-annual. Isn’t it time to look for another home/apartment? Are your taxes optimized?
If you cannot optimize an item right away, when do you want to get back to this question? (end of a season, end of school year, end of subscription?)
After this exercise, you should feel, that you proudly pay only for things that worth it.
Step 3. Account for planned expenses
Some expenses will happen for sure: annual taxes, bi-annual insurance, vacation, or gifts for holidays. The sad reality is we tend to forget about them till the last moment, and then “unexpectedly” they come: and we take a loan or heavily use credit cards…
I will not unveil you the secret: it’s better to pay with your money than to borrow others’ money and owe the money and interest.
So let’s plan: list all the oncoming expenses. Next to the sums list the dates by which you need the money. Count the number of months left before the due dates. And divide the sums by the number of months: here is the minimal sum you need to set aside each month.
If it looks too big to you, the only way around is to optimize the sum you’ll need in the future (i.e. plan a cheaper vacation or cancel it at all). If it is not the case, face the sad truth: you cannot afford it.
Step 4. Kill silly things
All flexible categories are hard to work on because the spending here is based on behavior, rather than math. I suggest start with silly things, as this category constantly makes you feel bad, and if you make some progress in it, it will be much easier to work on all other flexible categories.
Silly things are in fact impulse buying. I already wrote several posts what I usually do, but here is the short recap:
- If you really want to buy something, set it aside for at least 30 days: write down in your wish list, and reassess later
- Find the money first: if you already budget, move money to the “silly” category from other categories, and spend only after it. It makes you stop and think… and in most cases cancel the urge… Who would like one more scent candle instead of the vacation?
- Know your pitfalls and avoid them: don’t go to a store “just to look”, don’t go anywhere when you are hungry
- Mentally think what will you do with the thing after you buy it: you need to put it somewhere (where?) you’ll need to take care of it (dust? wash?). Do you still want it?
- Finally, if you do enjoy impulse buying and it makes you happy, set up the monthly budget for “silly things” and indulge yourself within it.
Step 5. Work on monthly expenses
Monthly expenses are changeable expenses, though you must pay them. Examples (depending on your situation) can include grocery, gas, child care, healthcare, etc.
Besides the fact, that it is a flexible (read “behavioral”) category, the “must” category implies, that you cannot simply cancel the expenses. By the end of the day, you need to eat!
I work on the items one by one, and the tips are very different for each of the items. But the overall approach is the same:
- Analyze your spending habits
- Benchmark: is it OK for your social cycle, way of your life, and your targets? Or you think that you spend more than your peers?
- Research: find tips and tricks. There are plenty of resources with pieces of advice on the Internet.
- Try and assess: try the tricks which appeal to you. Works or not?
- Stick to what’s working. Build your new rules and habits based on the trial
Step 6. Be ready for punches
If you plan for this category, it immediately brings a sense of security. Unfortunately, before you deal with the categories mentioned above, usually there is no money left to plan here. That is why it’s only number 6. However, if you are lucky enough to have some savings/leftovers without preliminary optimization, I would suggest work on it right after Step 3.
Here you plan for the unknown, for all risks which can appear on the way.
Ask yourself: what can go wrong? If you get ill, what copayment would you need? If something happens to your pet, what money would you need for the vet? Which unexpected expenses would need for your car?
Because we are dealing with an unknown, you cannot get an accurate number. What you can set is the number that makes you comfortable whatever happens. It’s also better to think itemized (i.e. “Healthcare”, “Car repairing”, “HVAC repairing”, etc.), rather build just “Emergency fund”. The reason for that is our psychology: we feel much less anxious when we see the items are funded rather than the unnamed bucket. (Though, to tell the truth, after I funded all specific risk categories, I did create the “Emergency Fund” as well… you never know).
The algorithm is the same as we do for planned expenses (Step 3) with the exception that you replace the exact sum with your comfort sum and the exact date by your wish date.
Step 7. Balance Lifestyle and Saving
In my post regarding the tracking of expenses, I mentioned that saving is the most important category you would like to work with. It’s building the wealth that will feed all other categories in the future. Saving is a magical category, which can show you how money generates money.
Unfortunately, it’s the last category you are working on because you are dealing with leftovers of all other categories. The hardest choice you will constantly do is how to balance your saving with your lifestyle. Sometimes people refer to it as “live now vs. live later”.
The truth is your lifestyle is important: it’s how you self-define yourself, what you enjoy in life. Sometimes it turned to be false goals as “keeping up with Joneses”, but sometimes it relates to what defines you as meeting friends or having family time. What car you drive, in what house you live, what are your neighbors, and what are your friends, – all these can be translated to some extent to what money you spend.
Your lifestyle is you, and you need to make your decision which expenses are based on your deep values, and which can be omitted. Is it important for your values to have a new car? Or you are OK to buy a used one? Is the private school bringing advantages to your kids? Or you could find a good public one? I will not provide your recipes here.
The only thing to remember: if your lifestyle prevents you from saving at all, you cannot afford such a lifestyle. It’s time to hold off and to think.
Conclusion
The plan I outlined is about to take months and probably years. But it’s very much possible.
It’s also a continuous process: as soon as you finish, most probably it’s time to start anew. Life changes and your circumstances change as well.
The main outcome, that after passing all the steps you will feel empowered, you will feel completely in control of your money. And it is definitely worth it.
Katty's Wallet 