Continuing the financial planning theme from yesterday, I am going to focus on tracking in a little more detail.
This will lead to a discussion of financial net worth in a future blog.
Tracking
Years ago (before the dawn of personal computers) I tracked all my families income and spending manually using a financial ledger (yes a real book) which I wrote figures in (yes with a pen).
In the early nineteen-nineties I was a early adopter of quicken for windows (a so called personal financial manager – PFM). I used it for tracking my income and expense as well as an ongoing financial net worth calculation. It was much quicker and less messy then the ledger system, which went bye-bye. I strongly recommend if you are not using one of these “apps” you start right away. As mentioned in yesterday’s post all financial planning stems from this one basic foundation – ongoing tracking.
Which Financial Tracking Tool
For getting started basically you want a product that contains functionality that lets you enter each expense and and income entry by category and by account type (e.g., checking, saving, investments, loans etc). Most products have default categories to track spending by and you can add your own custom.
Although I am an early adopter and long time user of Quicken I have flirted with other products. In the end though the benefits of alternate tools have not been enough to drive me to change. However, I would recommend a google search to find the application you are most comfortable with (there are some great free shareware products out there).
I got a tool and I am entering every transaction, so what?
The basic tracking information you are gathering in the tool has three principle uses. (Disclaimer, this is planning 101 so I only am describing the basic uses, there is a lot of advanced stuff you can do)
- Report on spending by category over a specified period – You can do this review weekly, monthly, quarterly, etc. I personally just do it annually (so it is not a lot of work and is just once a year).
I keep all the summary output of spending by category for each year (my current spreadsheet has 25 years of data). I can compare what the difference in category spending is year over year; year over overall average; and so on. This lets me see trends at a glance and make decisions. For example restaurant spending is on the rise, automobile repairs tripled year over year but are close to the average.
These observations (which I basically make once a year) let my wife and I manage our spending behavior to match our lifestyle, rather than visa-versa. This is not a work intensive exercise and the benefit is amazing.
For example the rising cost of the auto maintenance category could lead to a decision to use public transit (reducing auto cost) so more money is a available for other things we prefer.
I should note that the analysis you make should be as broad and long reaching as you can, not just a tactical year over year consideration.
- Income vs. Expense – I will describe this in a future post.
- Net Worth Calculation – I will describe this in a future post.
Hi Steve! I agree that Financial Tracking is an important activity….especially for younger people trying to figure out how to achieve their dreams of new home, new family, and so on.
Financial Tracking is also a necessity for people who may be living paycheque-to-paycheque; are heavily in debt; or generally have trouble paying attention to where they are spending their money.
But not everyone needs to track all their expenditures to that level. A neat way to avoid getting “caught” over-spending is to actually create an “expense” called “savings” (or “investments”, or “retirement” or “new boat”, etc.). The idea here is to arrange for your bank, financial advisor or your investment manager, to automatically TAKE money out of your account as if it was a bill that had to be paid. And, you can set these “bills” up for as many life goals (and amounts) as you want!
Not sure if it was Chilton (in Wealthy Barber) who coined the phrase “Pay yourself first”, but that is the general idea. If you’re investing in stocks, mutual funds, etc., the added benefit of setting up these regular “bills” to save/invest more is the concept of Dollar-Cost-Averaging (which is a great concept your blog readers can learn about via the web).
So, my theory here is that, if I’ve set up all my regular bills (utilities, mortgage/rent, etc.), and I know how much I need in a typical month for food, entertainment, etc…..then I should create “bills” to contribute to my life-goals to consume the rest of my take-home pay (or pension).
Now, there is one caveat to this plan. You DO need to keep an eye on your chequing account fairly regularly. You don’t want to go into Overdraft (at high rates), or have cheques or other payments bounced, or find yourself embarrassed at the grocery store when your Interac payment is denied. So, make sure you have frequent access to your account information via your banks’ online or mobile banking options.
Cheers!