I know what you are thinking……Looking at spending is going to be a terribly painful exercise. I promise to make it as easy as possible, because frankly. I don’t enjoy tracking our spending either. Especially if I had to do it down to the dollar or penny.
Before getting too far into this post, I want to highlight that I am not a budgeter. I prefer to set a savings goal and spend whatever is leftover guilt-free without thinking about where it fits in my budget. If that sounds good to you, check out the link above!
That does not mean that we do not look at our spending though.
When we first started our FI Journey, we reviewed all purchases, every month, to better understand our spending habits. That level of tracking is not as critical today as our spending habits have matured and we have a lot less WTF were we thinking lines on our credit card.
I won’t be able to tell you when that transition will happen for you, but if you stick with it long enough you won’t even realize you are making solid spending decisions. They just happen – it’s awesome.
Where does your Money Go Today?
Going to look at 3 different categories to figure out where your money is going today. A few notes before going into this:
- Not including taxes. Looking at the money you have control over after taxes are taken out
- Not putting Investing/Saving as Spent money. Want to look at where money is flowing outside of investment accounts. (we track investment accounts on the savings tab)
- Don’t try to do this from memory, your account statements are your friend
I added a new tab to the FI Action Series template below for spending. I will get this in a central spot and update posts so you only have to download once moving forward.
Get the most up to date template at the Financial Independence Action Series page
I roughed in some numbers as an example in this spreadsheet
Recurring Required Monthly Spending
Everything you need to keep you and your family alive, safe, clothed, insured, and capable of getting around. I included loan payments in here because until they are paid off, you don’t really have a choice if you make them or not.
These are costs that you incur every single month. For the most part, they are going to be the same amount (insurance, mortgage, etc).
Find your average spend for variable costs that come out of your account every month at a fairly consistent rate (gas, water, etc).
Recurring Discretionary Monthly Spending
Everything above and beyond expenses to keep you alive, safe, insured and able to get to/from work that you pay every month.
I know a lot of stuff seems like a necessity today (Cell phone anyone?), but I like to look at discretionary spending through this lens: If we had a financial emergency or job loss, would it be on the chopping block to get by?
If the answer is yes, put it in the discretionary column.
Action Items: Go through your accounts and list out all your Recurring Required and Discretionary monthly expenses in the template.
For us, this is mostly our credit card spending for day to day living. Gas, groceries, entertainment, eating out, etc. Instead of bucketing every single cost over the last year, simply put your credit card or checking account spending per month for the last 12 months to get an average.
We will look at this spending in-depth below
Action Item: Get last 12 months of credit card/checking statements added to the template. Make sure to remove spending that is duplicated in the Recurring Monthly Spending columns.
Conduct a Spending Review
Depending on how closely you monitor your spending, this may be incredibly boring or an eye-opening “WTF” experience. It was the latter for me when we first started doing these.
For our Spending Review, I print out our monthly Card Statement and go line by line with 2 highlighters. One to highlight necessities (Gas, grocery store, etc) and one for discretionary spending (Eating out, entertainment, beer).
Another option would be to download your statement into excel or use Mint to track your spending. I prefer the printed statement as I don’t do much with this information anymore (more of a monitor/review since we have built up solid spending habits).
Right now, we are looking for a baseline in your spending so it might be a worthwhile exercise to go through a few months worth of statements. I simply like to look at how much of our day-to-day spend is required or discretionary with a few exceptions highlighted below.
If a particular expense or set of expenses stand out, add up how much you spent on them each month. A good example, that seems to shock everyone, is how much money is spent on eating out, but you may have a different problem area. I also liked to look at how much we spent on groceries each month (more curious than anything).
Everything time I do this, I still find purchases that my wife and I don’t remember. We have to go back and figure out what we bought and see if it what type of expense it was.
A fringe benefit is to make sure your card information was stolen. I have had a few minor freak outs until we figured it out what the expense was for.
Action Item: Print out your last Monthly Credit Card and/or Checking Account Statements and review your spending. Do this every month until you are comfortable with your spending habits. We still check in at least once a quarter. More often if we have an unusually high credit card bill.
Major Concern Alert!
I will be digging into this big time later, but if your monthly spending total is greater than your monthly income – it’s time to take a hard look at your spending. Especially if the money is being put on a credit card with a high-interest rate.
Next Up: What is Your Debt Costing You?