Identifying the Expense Beast
Tracking your expenses is very necessary to ensure you are spending your money where it gives you the greatest benefit. For those of us who are very focussed on early retirement, I would say this is mandatory to help cut down our expenses and maximize our savings.
About 4/5 years ago, I did not mind how much I was savings. I do not think there was even 1 month where I check to see if my bank balance has increased. I was not an extravagant spender, I just was not careful about money. After multiple ‘conversions’ with my then fiance (now wife), I finally put in some effort to track my expenses every month. Instead of just listing down my expenses on a notebook or an excel sheet, I googled to see if I could find a readily available template that could meet all my needs.
The one I liked was a more detailed sheet than what a beginner might like, but I have always liked getting into the details. I figured, if I was going to track my expenses, I would do it the right way. I built-in the accounts I would track – back account, Cash on hand and Investment account. Since then I tracked my expenses diligently for over 2 years. But when I moved to Mumbai, this got discontinued. The last 2 years that we have lived in Mumbai, I have just tracked the net worth every 3 months or so, just to see that our savings remained at a level we are comfortable with.
I have started tracking our expenses in detail from this month (October ’16). So I can share a monthly expense report and track our progress going forward.
I have modified the excel to include some reports that I liked to review. I wanted to see a month-on-month or year-on-year comparison, a net income tracker, a goal tracker and have added these in.
Taming the Expense Beast
My suggestion is that you track your expenses for a minimum of 3 months and then average it across each category. Run a detailed analysis of the 3 months expenses to identify any one-offs, why they happened and how frequently they will repeat.This gives a more accurate depiction of how the expenses will look through the year. Once you have this information available, we move on to taming the beast.
The first step in taming the beast is to plan your budget. There are multiple tools available online, but I found the expense tracker to be good enough for beginners. Based on the average monthly expense, first list down expenses for categories that repeat every month. Then list down those that are periodic, like insurance payments. At the end of this, you should have a projected income for the year. Then list down your income sources and your expected income from each. There might be some like interest income where an approximation will do for now. This exercise should now tell you how much you will save for the year.
If you are saving more than 50% of your income, you are already doing better than most. If not, you have a lot of exciting work ahead of you to cut down those expenses that add clutter to your life and not Happyness. Take out your Happyness list and check if your planned expenses on other items is excessive and where you can reduce those. Work on each category by line item until you are satisfied you cannot cut anymore. I suggest a lenient approach if you are just starting off. We do not want to have an unhappy journey. Spreading the cuts across 3-6 months will help ease you through the transition, whereas moving from 20% to a 60% savings rate might frustrate you enough to abandon the whole project. You are the best judge of which approach is best for you!
You are now ready to tame the beast!
Keeping the Beast tamed
How do you ensure you do not over run the budget? I do not think any of us wants to calculate the category spend till date and how much of the budget is left before we spend money on something.
- The more hardcore way is to first move money to your savings – it can be into an investment or a different bank account (whose cards you do not carry with you). This way you are only left with enough money to spend as per your budget. Any overshoot in one category means a cut in another.
- Another option is to cut out all card based purchases. Take out enough money for the week/month. Have a separate envelope by category and the monthly budget in that envelope.
- For the more disciplined of us, I recommend using the card where possible – cash back and other rewards.
Each expense category needs to be attacked in its own way. Grocery is more of choosing a good time and place – bulk buying some products in sale ; buying from a different supermarket or local market and so on. Eating out is a discretionary expense for me and depends on individual lifestyle. I will try to share as much as possible on what the FS family’s expense plans are and why it is so soon.
Will also start a series on attacking each expense category and taming them.