Financial planning 101 - Step 1 - expense tracking
TLDR: Steps on financial planning - Expense tracking
If you have looked at my previous post around Financial planning 101, the first step on the way to savings and investing is expense tracking?
It might sound counter-intuitive, but shouldn’t investing be more about what I am saving, rather than what I am spending? It is and it is not.
Expense tracking is required to
Understand the split between wants and needs
The cost of survival expenses - mortgage/rent, utilities, groceries, education, transport etc.
Understand the trend and establish spend patterns
This is important for everyone, be it a fresh graduate who is starting his/her first job or someone else who has 20 years of experience and drawing a big fat salary. There will always be expenses that need to be managed, if you only plan to save at the end of the month after expenses you might not develop that financial “muscle” to it regularly.
If you don’t exercise your muscles, they atrophy.
Also, if you don’t really know where your money goes at the end of the month, all you will see is the money coming in at the start of the month and close to an empty bank account at the end of month. Tracking your expenses is the key first step in the journey towards financial freedom.
Investing what you are left with at the end of the month is no way to invest.
The essential first step in your financial journey of self discovery is to track your income and expenses. Most salaried employees probably depend on their salaries as the primary source of income. I am sure there are others who have rental income, dividend yield or a side hustle which act as secondary, tertiary sources of income. But for the most part it is salaries.
“Don't tell me where your priorities are. Show me where you spend your money and I'll tell you what they are.”
- James W. Frick
Tools of choice
Almost everyone has a smart phone these days and there are hundreds of personal finance apps that we could use for this purpose. I use an app called spendee, there are several others like YNAB, mint etc. Use what works for you.
I typically log my daily expenses at the end of each day, but sometimes twice a day if there are too many items to log within a day because I am travelling or doing many chores in a day. All it takes is 2 minutes of your time and I have the history going back to 2013 on the app, exported and synced to the cloud. Before 2013 I used an (now defunct) app called Piggie and spreadsheets even before that.
I have this long history of expense tracking at my disposal to see my patterns, trends and (not ashamed to admit) lifestyle creep over a good 10+ years.
We tend to over estimate our immediate needs but underestimate longer term expenses. So track your expenses and log everything you make and you spend, create a strong history over several years. This will help you better manage your expenses, distinguish needs vs. wants and predict and estimate your Financial Independence Retire Early requirements more accurately. This is your step 1 on the journey to FIRE.
Step 2 - Budgeting