The Importance of Tracking Expenses
The other day I helped a friend establish a budget. We did what most people do and set up categories that were meaningful to him and filled in either known or estimated monthly amounts. Few were known. Most were estimated. The end result gave him a much clearer view of his financial picture but I also emphasized to him that budgets are a work-in-progress. Some changes one way or another in his life could considerably affect his bottom line (read amount he can save!).
It is the work-in-progress aspect that I believe gets lost if the well-intentioned budgeter does not track actual expenses. I do not expect my friend to track expenses. The whole concept of budgeting is new to him and it would overwhelm his artistic sensibilities to take on this next step too soon. But for the rest of us who already budget conscious, I cannot emphasize enough how important it is to track real expenses against projected (or target) expenses.
Like most financial coaches/planners/advisers, I spend a lot of time talking about budgeting. Naturally, I have one of my own and thought pretty highly of my estimating skills. Then I started actually tracking expenses. So much for my skills! I was absolutely astonished at the actual versus the projected. This doesn’t render a projected budget useless. It just means that it’s a starting point. Here’s what I’ve learned over the past 5 months or so:
- I am almost always spending more than I think in the variable categories.
- Quarterly or annual payments are accounted for in the target budget but make monthly numbers ugly when they hit.
- Tracking can be tedious but gets easier with practice.
- It’s HARD to remember to track every expense. Even a high degree of motivation doesn’t necessarily equal 100% compliance.
- Confidence in your numbers grows also with practice.
Tracking breathes life into the budget and helps you focus on specific categories. Groceries were our first target as described in this post. This month we are detailing out the individual purchases in the dangerous ‘œmiscellaneous household’ category to have better insight into what we are spending and how to reduce it. We expect this to go down given our recent warehouse club membership. Or maybe we can’t reduce it further and we just need to adjust the target as Regan discussed in her post yesterday about her budget for eating out.
This is not an exact science. As I mentioned above, some categories have amounts that are estimates of annual expenditures (clothes, medical expenses, etc) divided by 12. I think we will have reached equilibrium in our process when we start seeing some months come in under target and some over but generally trending close to the projected average. My goal is to track for at least one year.
So how about you? Do you track or trust? Some or all expenses? Do you have tricks to share to make it easier? Would love to hear your thoughts.
Photo credit: stock.xchng.
Thanks for the practical budgeting advice. I agree that tracking expenses isn’t an exact science, but it’s really critical if you want to figure out why your paycheck doesn’t stretch to the end of the month.
This may verge into venting a bit, but one of the reasons I’m a faithful reader is that I know it’s a community of people who care about personal finance as much as I do 🙂 I’m sharing my budgeting and spending system in hopes that someone can suggest a better one!
I use an Excel spreadsheet which sets the monthly total I can spend at the equivalent of my [post-tax & IRA contribution] month’s salary at my regular job (second job is fun money) and then breaks that spending into about 20 categories. Some of those are fixed expenses like rent and student loan payments, and the others are allowances limiting what I can spend in that category and remainders get stockpiled. For example I have $90 a month to spend in utilities, but when it’s lower in summer, I let it sit to cover higher heating bills in winter.
While this gives me considerable cushion for irregular expenses, it’s also less flexible than real expenses can be, and is cumbersome to track, especially when there is irregular income such as mileage reimbursements for work. I’m also dating a spender and our relationship has real long-term potential; this is far beyond what I could ever ask her to do in a shared expense situation. I’m considering a more flexible system of four categories- 1. fixed/expected regular expenses, 2. long-term savings for a house and adoption, 3. short-term savings for such things as travel or other large purchase, and 4. savings for irregular expenses like medical expenses or car repairs.
Hey Kim. What works for me on the expense side is to use an average number for a category, such as your $90 for utilities, then track the actual against it. So for us (in FL) that number is much higher in summer than winter. As long as over time the average is about $90 I feel pretty good about it. We have a cash fund to draw from during those months when it is higher.
I like your idea of saving “buckets” according to your needs. I would suggest some prioritization of your “savings for irregular expenses” over the other two which are more discretionary. Once you have the equivalent of about 6 month’s living expenses in your priority savings bucket, you can focus on the others.
Happy to hear you’ve found someone special. Might I also suggest some discussions about your respective financial goals as you get more serious? In Money Without Matrimony (I did a review on this site), Sheryl Garrett suggests making a list of 30 things you’d each like to do in your life. This can serve as a non-threatening way to know each other better and explore financial goals as well. Good luck!
Thanks Carol- it sounds like you have a similar system actually, but have probably done a better job with estimating what will be spent on average. And yes, I have the six months’ savings.
Finances for the future have been a sticking point in my relationship, so I’d like to try that suggestion. Thank you!
After several years of trying to come up with averages in categories, I had a brainstorm. Make the planning part of the budget flexible enough to enter amounts for every month. So now I can budget extra money for AC in the summer, or groceries in the months our college student will be home. When halfway through the year we decided that our money market wasn’t really working too hard for us and that instead we should throw the extra savings into our mortgage, we were easily able to re-plan July – Dec without tossing the whole budget.
And, yes, tracking is essential, and a habit that becomes second nature over time (unlike, say, snacking healthy, which I keep recommitting to).