Why We’re Going Back To Tracking Our Spending
- Why We’re Going Back To Tracking Our Spending
- I did what no one should ever do.
- Two Years Later
- Slow Drift in our Budgeting & Spending
- The Wakeup Call: We HAVE to Track our Spending
- Creating a System for Tracking our Spending
- The 4 Step Guide: How to Make a Budget that you can stick to
- How we are Actually Tracking our Spending
- Going Old School: Our Manual Approach to Tracking Our Spending
- Our Next Step: Go on a Spending Diet
- Big Takeaway
Have you ever had a moment where reality hits you in the face?
A few weeks ago I was skimming through my twitter feed and a blogger friend of mine had posted something that stopped me in my tracks.
I’ll share the tweet here in a second, but first let me share what the past couple of years have looked like.
Three years ago I was working a job that I absolutely hated. Every single day I was miserable, stressed, and it was starting to affect my health and marriage. I had been applying to jobs and I thought I was killing it in my interviews.
I did what no one should ever do.
I quit without another job lined up and ready.
I thought I had some great prospects lined up. I thought I had a job in the bag. I thought it was going to be just a few short weeks off before I’d be back at work somewhere else.
I was wrong.
It ended up taking me 5 months to get employed again.
During that season of unemployment, my wife and I had to REALLY reign in our spending.
Truly, that season of unemployment is what led me to discovering the world of personal finance.
I started reading every blog I could find and we started cutting back on all non-essential spending as best as we could.
After five months I started grad school and was able to get a part-time job at a church that I love. Even though I had income coming each month, we still had to be as frugal as possible.
Out of necessity, we had to get our financial house in order. At the end of the day, the forced financial education has probably saved us more than that season of no income cost us.
Two Years Later
Fast forward a couple of years and I was now working full-time and my wife had outperformed at her job and received a couple of raises.
Combined Annual Income
- 2016: $52,619
- 2017: $66,369
- 2018: $95,125
During that time, we hardly increased our spending at all. Even once we were both full-time, we refused to let our lifestyles inflate because we knew it was the key to building wealth early on.
But about 6 months ago, we started to reward ourselves.
We talked intentionally about how we wanted to embrace a minimal amount of lifestyle inflation. I didn’t want us to drastically increase our spending, especially in things that wouldn’t bring us value!
The problem is that we didn’t stick to our minimal increase.
Slow Drift in our Budgeting & Spending
We had a written budget and a plan to stick with it, but over the summer, we completely let go. We stopped talking about our budget and we started to just go by “feel.”
In other words, we stopped following the plan and just starting going with the flow.
Generally, we thought we were being frugal, making good choices, and we certainly didn’t feel like we were spending extravagantly. But our monthly spending had ratcheted up by over $500!!
Essentially, our disciplined approach to handling our money began to slowly drift towards an undisciplined, “whatever happens” approach.
Talk about a FAIL!
Our spending on things like groceries and eating out went through the roof! Over the summer, we actually spent more money on food each month than we did on our rent. We stopped planning and saving for expenses and started letting life dictate what we spent.
Maybe you’ve been in our shoes before?
You’ve written up your budget and you know where all of your money needs to be going. You have a plan in place and you’re doing a great job executing it!
Then you get lazy.
Or you do what we did and just “go by feel.”
Maybe this is you right now?
Until my wake-up call last week I hadn’t realized how poorly we’ve been managing our finances.
The Wakeup Call: We HAVE to Track our Spending
Last week Veronika of DebtstoRiches had a great chain of tweets.
At first, I immediately thought of all the people who I thought needed to hear that advice!
It took my about 5-10 minutes to realize that she was also describing my wife and I’s money management over the last few months.
Veronika’s tweet could not have been more perfectly timed.
I was starting to feel some anxiety about our monthly spending as we got closer to closing on our house. I knew our spending had gotten out of control, but hadn’t done anything about it yet.
As a result of not measuring our spending, we stopped managing our money well.
“What gets measured gets managed”
Honestly? I HATE that quote. It’s overused by every boss and entrepreneur everywhere.
But I can’t deny that it is completely true.
The more closely you try to track or measure something, the more closely you’ll be managing it.
We stopped measuring our spending. We stopped keeping track of how much we spent on food, coffee, clothes, gas, and all of our other variable monthly expenses.
Don’t get me wrong… We were still making great gains in our net worth because we had a good amount of our monthly surplus automated to drop into our retirement accounts. But our spending climbed.
We fell into the “Net Worth Trap.”
The Net Worth Trap
The net worth trap is simple.
Far too many people focus on their net worth rather than their monthly spending and saving.
For the past 6 months, our net worth has steadily climbed thanks to a generous savings rate and to a booming stock market! We were seeing huge jumps each month and as our net worth chugged along at a wild pace, our financial discipline actually started to slip.
After all, when your NW is jumping $3-5k a month, it’s easy to get lulled into a false sense of success.
As our net worth climbed, our savings rate actually declined.
Tracking your net worth is fun and helpful for a bunch of reasons, but at the end of the day, your net worth is still only an outcome goal. You can spend all the time you want trying to grow it, but unless you have processes in place, you won’t see any success.
And even then, the returns you get in the stock market are out of your control.
What’s in your control though is your monthly spending and the amount you are funneling into investment accounts each month.
Tracking your spending is the process that leads to a growing net worth.
If you’re trying to get your monthly budget back under control, you need to create a system for tracking your spending.
Creating a System for Tracking our Spending
The last time my wife and I tried to stick to a written budget, we made it work for a few months, but it was honestly overwhelming and too time-consuming.
Between marriage, both of us working full-time, and my grad school work, we just didn’t have the time to track our spending. And that list doesn’t even include eating healthy, working out, time with family, friends, church, or growing this blog.
The reason our last budget didn’t work is because it was too much work to track & manage. The problem was that we didn’t have a system in place that would work for us.
So I recently set out to come up with a system that would fit our needs.
Because at the end of the day, the most effective budget is the one that you’ll stick to.
The #1 requirement for our next attempt at budgeting was simplicity & hands-free. I wanted our system for budgeting to be as simple as possible and the less work that I had to personally do, the better.
I knew that the less time and effort we had to put into managing our budget and tracking our spending, the better our chances at making it a long-term thing.
If you already have a written budget, feel free to skip this section to get to how we are actually tracking our spending.
The 4 Step Guide: How to Make a Budget that you can stick to
This is a quick and dirty guide to making a budget you can stick to. You only have to do steps 1-3 one time and then the rest of you ongoing budgeting work is spent in step 4. If you want to check out our full 3000+ word guide, here ya go: Zero Based Budgeting: The Ultimate Guide to Win with Your Money.
Step One: After Tax Income
This is pretty simple. You just need to know how much income you are actually bringing in each month after taxes. This is how much you have available to budget and put to work.
The easiest way to do this is to just look at your bank statement to see how much is direct deposited each month. If your employer is withholding the right amount, then you should have no problem come tax season in April.
If you are self-employed, you’ll have to withhold the taxes yourself, which is a bit more complicated.
Step Two: List out all Fixed expenses
The second step in making a budget is listing out all of your fixed expenses. These are the bills you have each month that hardly ever change or you can’t change until a contract is up (ex. Rent each month is fixed, but it could change in the future).
Fixed Budget Categories
- Housing expenses: Rent, mortgage, insurance, taxes, etc.
- Cable if you have it
- Gym membership
- Loan payments
- All monthly subscriptions: prescriptions, pet food, Netflix, etc.
Even though these are fixed, there is still some room to negotiate them down.
All of these should be set-up on automatic billing and you should never think about them again unless you plan to negotiate them.
Step Three: Create Sinking funds
The next step is to create sinking funds for any expenses you can plan for in advance. I’ve got a whole guide that can help walk you through how to set up sinking funds.
A sinking fund is a separate account set up that you deposit money into each month for expenses you can plan for.
Sinking Fund Budget Categories
- House improvements
- Tax set-asides for self-employment
- Pet expenses
- Annual membership to Costco
- Car maintenance
Again, the key is automation.
We totaled this all up and set up a monthly transfer from our checking account to our savings account. This way, whenever we have expenses come up in this categories, the money is already saved up.
Step Four: Variable expenses
Now you need to list out all of your monthly variable expenses. These are the things that can change month to month.
These are also the categories that you have the most control over.
In other words, THIS is where you have to put in the work each month.
These variable expenses are the categories that you have to keep an eye on.
Variable Budget Categories
- Eating out
- House: Furniture, decorations, etc.
- Entertainment together
- Everything else
How we are Actually Tracking our Spending
The only category we have to actually track is our variable spending because this is the only room where we can really mess things up.
It’s not like you’re going to accidentally increase your monthly rent or car payment, but if you aren’t careful, you could easily end up spending a few extra hundred bucks on food or entertainment.
Our trick to making this as easy as possible is to lump the categories together. The less categories we have to keep track of, the better.
We essentially boil down all of the above variable spending categories into 4 areas:
We know that our monthly budget for groceries is $350, eating out is $150. We buy most of our small house supplies where we also buy our groceries so we just lump that in all together.
We are about two weeks away from closing on our house, so we are expecting to have a lot of furniture / decoration needs over the next few months. Our max budget each month is $150.
One of the biggest things that helped our marriage was instituting a personal allowance. We get to spend this on whatever we want, and it is our responsibility to keep track of it. Anything we spend on clothes, coffee, or activities falls into this category.
Lastly, we have a catch-all category for everything else. This is entertainment, regular car maintenance and other random expenses that come up like wedding gifts, etc.
We only have to keep track of the spending items that fall into those 4 budget categories.
That’s my list of all the things we needed to be tracking our spending on.
Now I’ll share our approache to actually tracking the transactions.
Going Old School: Our Manual Approach to Tracking Our Spending
In a world of automation and applications, it makes no sense to do things that old fashioned way, but that’s exactly what we’re going to do!
We’ve used both YNAB and Mint before and we’ll probably use one of them again someday, because they are both fantastic budgeting apps!
The problem for us though is that whenever we use a budgeting app like that, we ignore it. An app like that can look at all of your spending and automatically put it into budget categories. The problem though, is that it doesn’t always drop them into the right one.
The last time we used Mint, we spent more time making sure every expense went into the right category than if we had just manually done it.
I also think the more we are personally engaged with the tracking of our spending, the less we will end up spending.
Now, we’re not going to go so old school that we use pen and paper, but we’ve set up a google spreadsheet to help us track all of our spending in these categories. Each time we buy something, we plug it into our shared spreadsheet.
Fortunately, we’re looking at maybe 20-25 total purchases in a given month.
I figure it takes about 60 seconds to pull out our phone after buying something to input it into our spreadsheet.
If it takes us 25 minutes a month to track our spending, that’s not bad at all!
Our Next Step: Go on a Spending Diet
As our spending has inflated over the past few months, the biggest issue is that we’re no longer spending our money strictly on things we value but we’ve let money get wasted on things that don’t contribute to our current life or our future life.
So we’re going on a spending diet!
That means that for the next 8 weeks, we’re only going to be spending money on what is essential. We always budget in plenty of room for fun spending and some small luxuries, but it’s time to trim the fat!
Budgeting is a lot like dieting. It’s easy to get off track and after a few months you start to notice some of the side effects. Every once in a while, you have to really reign in your eating to drop a few pounds.
That doesn’t mean this is a permanent change or a whole new lifestyle, but it means saying no to the things we like so that we can reach our goals.
We’ll be keeping a super close eye on our food & groceries budget because that’s where we tend to really let money fly out the door! We’ll be using my list of cheap meals to really step up our savings in this category.
Maybe you’re like us and your spending has gotten out of control. You’ve stopped tracking your spending, keeping up with your budget, and you’ve let life take control rather than you take control of life.
It’s time to get back in the saddle and take charge.
Revamp your budget and figure out a way that you can start tracking your spending again.