The Importance of Tracking Expenses

In 2018 when my wife and I finally decided to get our financial life in order, we were at a loss of where to start. Given that only 34% of people in one poll responded that they were satisfied with their financial health, I expect it is a situation many people may find themselves in(1). As my wife and I explored how to get our finances in better shape, we knew we needed to establish a budget, and the first step I took in creating our budget was to analyze our expenses from the previous couple months. Although this was quite a tedious process, it gave me some great insights into our spending habits. With some guidelines on how much we should be spending in certain categories, it became very easy to see which spending categories were problematic for us. Now, I want to share the spreadsheet I used to accomplish this with you and talk you through my own numbers to show you how it works and just how useful it can be.

Cash Flow Worksheet.xlsx

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Cash Flow Worksheet Instructions.docx

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I want to preface this entire article with this: At the time, we thought we were living paycheck to paycheck. Yes, we knew we might be overspending by a little on certain things, but we really thought we barely made enough money to cover expenses. The insights we gained by looking at these expenses showed us just how wrong we were.

Every expense and income for two months went into the chart. I tried to keep the categories specific enough to know where our money was going, but general enough that there weren’t a hundred categories. In the end, I ended up with 15 categories, which you can see in the chart, that cover any expenses that will come up. These categories are generally similar to the categories you will find in popular budgeting/expense tracking apps and in recommendations people give on spending percentages.

Right away, I could see for those two months we hadn’t spent more than we brought in, something which was not true every month. At that time, rent and utilities (which together typically make up 25-35% of people’s monthly expenses) were only accounting for 15.8% of our expenses. Looking at that, we shouldn’t have been feeling like we were living at the edge of our means. But, over that two-month period, we spend nearly 17% of our income on restaurants alone. That doesn’t include the 17% we also spend at the grocery store. We were spending considerably more on restaurants than we were on our housing. We were also spending over 11% our monthly income on credit card payments. And although we were only spending 2% of our monthly income on student loan payments, that was before the repayment period really kicked in. We were making absolutely no progress on our student loans at that point.

This is the power of tracking your expenses, especially if you have some guideline percentages to compare them with. It was very easy to see that we were wasting stupid amounts of money eating out. We were also losing quite a bit of money paying for things we had already purchased on our credit cards. Those two categories alone accounted for nearly 28% of our monthly expenses, over $1000 monthly. We were only living paycheck to paycheck because we continually made poor decisions. We were living with no plan for our money and just spending it however we wanted. And it was killing our finances.

The good news: By reigning in our restaurant spending, we could free up $600 per month to go to more important things. Freeing up that 17% of our monthly income, we no longer felt like we were living paycheck to paycheck. We could put money into other things like paying down our debts, which in turn freed up more money every month. By the time we paid of our last debt, we were putting nearly $2,000 per month towards debt. Then, we had that $2,000 per month to reallocate to other categories like saving for retirement or kids’ college. Once our debts were paid off, we even put some of that money towards restaurants again (though not nearly the $600 it had been). It all started from analyzing our expenses which forced us to face our poor financial decisions and helped us make better ones.

It is very simple to turn this Cash Flow Worksheet into a Monthly Spending Plan. Once you have entered your income for the month, you can use the recommended amounts as your budgeted amounts for each category. You will learn as you put your Monthly Spending Plan into practice for a few months, and those numbers will change to reflect your unique financial situation. However, they are great numbers to start from. Of course, the recommended amounts for Credit Card, Student Loans, and Medical are $0. That’s because in an ideal financial situation, you won’t have student loans or credit cards to be making payments on. Medical is a bit unique. In our situation, we don’t budget for medical expenses. Our health insurance is paid for through work, and we cash flow any expenses that may come up. But, if you have recurring medical expenses, you may need to plan for those. For all three of these categories, if you have debts you are paying on (as we did when we started this), you will have to budget for those payments, meaning your Monthly Spending Plan amounts will not be $0 for these categories. You will have to decrease your planned spending amount from other categories to compensate (because you can’t spend more than you bring in). That’s the price we pay for having debt, and more incentive to pay that debt off as fast as you can.

This process can seem challenging, daunting, or even impossible at times. I promise you, you can do it. I’m here to help and walk you through the process step by step. Reach out to me if you have questions or simply want to talk over your situation.

References

1. 2020 Consumer Financial Literacy Survey. National Foundation for Credit Counseling. March 23, 2020