Thriving Millionaires

By Patrick

One of the most important things you can do is understand where and how you’re spending money. As I referenced in Lifestyle Habits That Contribute To Overspending, one of my biggest revelations came when I took the time to analyze it. The realization that I was spending over $1,000 a month eating out at restaurants made me realize that with a few small tweaks, I could be saving hundreds and putting that to work for me. The great thing about tracking your money? It’s easy, and there are a lot of ways to do it ranging from simple to complex. What I would like to talk about today are some simple ways you can track your money:

• Write itdown

This is probably one of the simplest and easiest ways to start; it’s the way I started. I kept an excel spreadsheet and broke down my expenses by category. I also outlined a separate area for monthly obligations that were mandatory and didn’t fluctuate too much (mortgage, water and electric bill, etc.). There are a variety of ways to do it, and as you go along, you will find out what works right for you. The only downside to this method is that it requires you to document all of your purchases. The minute you stop doing it, the method is no longer effective.

• Useseparate accounts for major expense categories

This solution allows you to bucket major expense categories and only use a certain card or account to pay for those. I’m not suggesting you go open a bunch of different bank accounts or credit cards to do this, but the concept can work for people who might just want to keep things very simple. One tool I’ve found that’s nice is opening a [Venmo] and/or [Cash App] account and then signing up for their free debit cards. This allows you to allocate a certain amount of money each month to them, and you can see how much you spent month to month. An example would be using your Venmo card for all expenses relating to eating out and entertainment and utilizing the cash app card for groceries. Don’t keep too high a balance on either one as they are not FDIC insured like a bank account.

• Utilizesoftware to track your spending

A lot of banks will provide a summary of your expenses free of charge. I’ve found these tools can be somewhat useful if most of your spending is coming from accounts associated with that bank. There are better tools out there that can link up with all of your accounts to provide a wholistic view of your spending. My Mom always used Quicken growing up, so I initially gave that a try, but unfortunately the software is expensive, and it looks like they haven’t updated the User Interface since the 90s. One App that I really like is called Mint. They are able to integrate with a variety of different banks, credit cards, investment accounts, and service providers. The best part about it is it’s free! And for those of you that use other services by Intuit, you probably already have an account with them, and can receive the benefits of using additional services from the same company.

• Implementthe envelope method

While I’ve actually never used this method, my wife told me about it one day when we were talking about how we would manage our expenses when we got married. A friend of hers at work used it, and it really provided her much more clarity and restraint on her monthly spending. Essentially, the concept is very similar to “using separate accounts for major expense categories,” the only difference is you put cash in the envelope each month and spend it as you need it. When you run out, you’re out of luck! If you decide to use this method for something like groceries, I advise that you be careful. We wouldn’t want you to run out of money for food!

While there are a variety of different ways to track your spending, the important thing is that you do it and review where you stand monthly. My personal preference is to use some sort of App like Mint, as it easily links with all of your accounts, and automatically categorizes expenses for you. It will take some time to get an understanding of how exactly you’re spending your money, but once you do, you will be able to start to plan and act differently. I hope that you’re able to gain some insights from one of the methods above, and find out what works best for you!

Eric’s Thoughts

Patrick is exactly right when he says “one of the most important things you can do is understand where and how you’re spending money”.

Take yourself out of the realm of personal finance for a moment and think about a doctor trying to cure someone’s ailments, without first understanding the root cause of the symptoms. Or an electrician working to fix some faulty wiring without first understanding what is causing the short. Or a business person looking to sell more product without first understanding who is currently buying the product and why. Said simply, it can’t be done. Or, perhaps said better, it can’t be done efficiently or effectively.

Because the formula to grow net worth is simply to earn more than you spend and repeat – knowing how much you spend and where/why you’re spending that amount is half the equation. So, if you are serious about working to grow your net worth and help yourself thrive with your personal finances, you will want to invest the time in tracking and understanding your expenses.

But here’s the good news – you don’t need to take a week off of work to review all the paper receipts you have laying around your home. Thanks to technology, this process can be fully automated via services like Mint by Intuit as Patrick mentions, Personal Capital, and various bank services that offer the same functionality.

The way these services work are all functionally the same: they aggregate historical transactions and use merchant codes and algorithms to make a reasonable guess at what expense category the expenditure falls into. My experience has been that the service’s guess is accurate about 90% of the time.

My wife and I use Mint for this because it gives you the ability to aggregate transactions across functionally all financial institutions. Here’s how we have used it:

We reviewed historical data to understand where we were spending money by category and estimated what an appropriate budget for that category would be. Once we had these rough thresholds, we looked at the sum of our budget categories and compared that total to our total income to see how much would be left over to save. When we found that our expenses were closer to our total income than we would have preferred, we started making small adjustments by category to get to more balanced numbers.

For example, we originally had $200 in our monthly budget for meals out. When we decided we wanted a larger differential between our income and our expenses, we reduced that budget to $100 and agreed that we would try to have a meal out every other week as opposed to every week.

Because the saying “garbage in, garbage out” is true when it comes to data, I review all recent transactions every few days in Mint and can manually override the pre-selected category to ensure it falls into the right expense grouping and budget.

For example, Mint likes to code our Walmart purchases as “Shopping” when, in reality, about 80% of our transactions at Walmart are for groceries. By monitoring recent transactions, I can fix small errors like this to ensure I’ve looking at the most accurate data when tracking our expenses and managing our status vs our budget.

Given that Mint aggregates historical data as well, I am able to monitor trends in our spending and make adjustments either to our budget or to our spending habits accordingly. When we became new parents, our grocery bill slowly began increasing given that we were buying for 3 rather than 2. This was an area that I found myself increasing our grocery budget by about $100 per month to accurately reflect our new rate of spending in this budget category. There were no behaviors we needed to discuss changing nor could we really cut back our spending to stay within budget.

Conversely, when I began working at my new office job (previously I was working from home), I noticed an increase in spending in our “Meals Out” budget. This was one that I could change by making some adjustments to my behavior. Here’s what we did:

I created a separate budget line for “Meals at Work” so we could track our spending on meals out as entertainment vs meals at work. This allowed me to understand the sub-components of spending on prepared food. Secondly, I allotted only $25 per month to “Meals at Work” which would allow me to purchase food about once per week. To ensure I wasn’t going hungry the other 4 days at the office, I began bringing lunch from home (which you can read more about here).

By staying on top of our spending habits and budgeting appropriately, we’ve been able to stick to our plan and adjust when needed. I have a very solid idea of where our money is going and can check our progress against our goals with a tap on my phone. Mint works for us, but it may not work for everyone. Patrick mentions that he used a manual Excel-based expense tracking system. The reality is, the means by which you track your expenses is far less important than the fact that you are tracking spending in general.

Once you know where your money is going, you can begin to think about whether or not you want it going there. But if you don’t know where it’s going, you can’t make an informed decision for your financial well-being.