I hope I don’t lose too many readers from the title alone. The reality is – everyone hates budgeting. It is tedious, takes a lot of time, and requires constant self-control. However, it doesn’t have to be that way. My easy peasy budgeting system only needs an hour of your time per month. Most of the effort is reviewing your expenses at the end of the month. Tracking your expenses is a chore when you’re starting out, but it can become enjoyable as you gain control of your finances. Now, I look forward to going over our spending at the end of every month. It’s a nice way to cap off the month to see how we did financially. It wasn’t always like this. In my 20s and most of my 30s, I didn’t track our cash flow and didn’t even have a budget.
Luckily, I was naturally frugal and came through that phase relatively unscathed. I had a solid income and a steady engineering career. That income was enough for me to max out my 401k contributions, pay the bills, and splurge occasionally. I focused on living within my means and that was already way better than most US households. Handling personal finance like that isn’t bad, but it isn’t optimal. I spent a lot of money on unnecessary stuff (e.g., that snowboard, video games, beer…). Our household finance improved tremendously once I started tracking our expenses in detail. We optimized our spending habits, saved more, and eventually achieved financial independence. Tracking your expenses is a great habit to cultivate. Today, I’ll quickly go over the benefits of tracking your spending, share why I love it, and show you how to budget with minimal pain.
Benefits of tracking your expenses
Let’s go over this part quickly. All of us already know it’s good to track our expenses, but we don’t like to do it. It’s like homework when we were in school. Here are a few of the benefits to remind us why this is a good habit.
- Know what you spent money on. A lot of us spend money on stuff we don’t need. I’m guilty of that, too. We paid for an internet + basic TV package because it’s the same price as the internet alone. However, the basic TV has all kind of added fees (broadcast fee,etc…) We rarely watch TV after we moved and I finally canceled it. This kind of thing tends to slip through the crack if you don’t track your expenses.
- Less impulsive spending. The process of tracking our expenses gives me an extra barrier to avoid impulsive spending. I don’t want to have to justify spending money on unnecessary stuff to myself at the end of the month. It gives me an extra second to think before spending money.
- Better relationship with your partner. A good relationship has no secrets. We go over our expenses together and we can see what we spent money on. Occasionally, my wife spends money on clothes and shoes. That’s perfectly okay. If it gets out of control, we’ll find a way to slow down together. It brings us together as a team.
- Improve your spending habits. The only way to improve is to track your performance. Most people don’t even know how much they spend on eating out every month. Once you know you spend too much on a certain category, you can focus on improving it.
- Easier to track net worth and set financial goals. Once you start tracking your expenses, it’s easy to go to the next steps. You can track your net worth and set good financial goals. Tracking your net worth is a great stepping stone.
- More financial security. It’ll help you gain control over your spending. You’ll know where you can cut if needed. You’ll feel like you’re controlling your money instead of the other way around.
Why I love tracking our expenses
Maybe I’m a bit strange because I love tracking our expenses. I go over our bank account and credit cards line by line at the end of every month. This gives me the chance to review our purchases. I can ask myself if each purchase makes sense or not. Over time, I was able to reduce impulse purchases and avoid spending money on stuff I don’t use/need.
Another reason why I enjoy working on our cash flow spreadsheet is that I get to work with numbers. Math was a big part of my life for a long time and I’m glad I still get to use some of it. I can make cool charts and use them on my cash flow posts. Oh, that’s another benefit for me. Once per month, I can write about our expenses and don’t have to dream up another blog topic. It’s an easy blog post. Writing a new blog post from scratch takes a lot of creative thinking. For example, I’m really struggling with this post. It’s taking a lot of time and it’s difficult to write.
Lastly, the improvement is real. In 2012, we spent about $2,000/month on housing. Now, we average about $1,300/month. We moved and optimized our housing expenses. That’s the best-case scenario, though. Normally, just holding the line is good enough. If you can keep your expenses the same as last year + 2% (inflation), you’re in really good shape. Most households get into trouble because of lifestyle inflation. They increase their spending too much from year to year.
Joe’s Easy Peasy Budgeting System
Is there a way to make budgeting easier? Yes, there is. But I actually enjoy tracking our expenses so I do it the hard way. We’ll go over the easier way to track your expenses next.
I have a spreadsheet that I update manually every month. It looks something like this – cash flow spreadsheet on Google Sheets. You can check it out and use it as a template if you’d like. You’ll have to customize it for yourself.
I log on to view my bank accounts and credit card statements. Then, I manually enter each expense into my spreadsheet. This takes about an hour for me, but it really depends on your finances. If it’s simpler, it will take much less time.
Entering each line item manually gives me a chance to think about those purchases. If I don’t remember some of them, I’ll check with my wife. She might have purchased something. Usually, I can recognize what we spent money on. The credit card statements give just enough information. Here is an example from our credit card.
Jan. 12th – Mrs. RB40 got a ticket for TEDx Portland.
Jan. 11th – I went food shopping and got gas.
Once I figure out how much we spent that month, then I compare it with my budget. In 2019, I had a monthly budget of $4,000/month. If our monthly expenses are below that, then I’m done. If it’s higher than $4,000, then we need to sit down and figure out why it’s higher than expected. Next month, we’ll try to improve if we spent too much this month. That’s it!
This easy peasy budgeting system takes a while to set up because you need to know how much money you usually spend. Whenever there is a life change, you’d need to update your target. Once you have a good target, then it’s easy. You just spend an hour per month to figure out how much you spend and see if it’s under budget. After a while, you’ll see where unnecessary spending comes from. Then you can minimize those expenses.
The good thing about this budgeting system is that it’s simple. It depends on you to isolate any issues and improve the cash flow by yourself.
Lastly, you need to keep the target the same from year to year. This caps lifestyle inflation. Well, you could increase your budget by a moderate amount. You just need to make sure the budget doesn’t inflate too much. For example, this year I’ll increase our monthly budget by 5%. So we can spend $4,200/month. That’s reasonable.
An easier way to track your expenses
I highly recommend manually entering the numbers for a few months. It’s really helpful and gives you time to think about your purchases. However, it takes time and I guess a lot of people don’t really like numbers and spreadsheets. Once you’re uncomfortable with manual entry, you could use one of the many apps online to help track your expenses.
I use Personal Capital to keep track of our net worth. It’s also useful for tracking expenses. Their software has come a long way.
Personal Capital breaks down each expense into category automatically. You just need to go over each line and flag any expense that you don’t recognize. Here are the same expenses at Personal Capital. Sometimes, you’ll have to categorize a line manually. On the site, TEDx is filed under “Other Expenses.” I’d change it to entertainment. This is a lot more convenient if you don’t like manual entry.
*Sign up for a free account at Personal Capital to easily track your expenses and net worth. They also have a nice Retirement Planner and Investment Checkup app. It’s a great site for DIY investors.
Cultivate good habits
Tracking your expenses is a great habit to cultivate, but it’s difficult to get started. I heard that you need to get some kind of rewards so you can keep these good habits going. It’s enjoyable for me so the habit stuck without a lot of extra incentive. If you don’t like this kind of thing, you might need to create some incentive for yourself. For example, you could go over your cash flow at the end of the month with your partner so you can see how well it went. Assuming things are good, you’ll see your savings grow and that would be rewarding. You can celebrate a positive cash flow month with a toast or something like that.
Alright, that’s it today. Do you track your expenses and have a budget? Do you enjoy it? Let me know if I can do anything to help.
Image credit: Fabian Blank
Passive income is the key to early retirement. This year, Joe is increasing his investment in real estate with CrowdStreet. He can invest in projects across the U.S. and diversify his real estate portfolio. There are many interesting projects available so sign up and check them out.
Joe also highly recommends Personal Capital for DIY investors. He logs on to Personal Capital almost daily to check his cash flow and net worth. They have many useful tools that will help DIY investors analyze their portfolio and plan for retirement.