Technology has made it easy to track all your expenses. Here's why that's a bad thing.
The following post comes from Len Penzo at partner site LenPenzo.com.
I’ve been diligently managing my personal finances and tracking household expenses for more than 20 years.
How diligent, you ask?
Well, I can tell you that my cable bill in February 1998 was $8.03, and that I spent $141.16 in 2006 for an annual subscription to the Los Angeles Times.
I can also verify with total certainty that 7 percent of my income in 2007 went toward groceries, and vouch that I spent $88.95 at my local K-Mart in August 2001. Just don’t ask me what for, because I’m not that thorough with my record keeping.
Why tracking expenses is important
Taking the time to track and analyze your income and where it’s going is a crucial element of managing your personal finances. That’s because doing so uncovers hidden money leaks that help you better allocate your resources, thereby ensuring you always get the most out your paycheck.
It makes it easier to set financial goals too.
Of course, prior to tracking your expenses, you have to record them.
While not impossible, trying to track all your cash purchases can be extremely tedious and time-consuming. On the other hand, everything purchased on your credit and debit cards is automatically recorded and available for review online or as part of your monthly billing statements – which is why I use credit cards for as much as I possibly can.
As for keeping tabs on how you spend your money, there are a panoply of options available.
Now, I realize many people are initially attracted to sites like Mint, OneBudget, Adaptu, and MyBudget-Online because their automation features essentially make the job of tracking your money almost effortless. The trouble is, in the world of personal finance I believe too much automation can be a curse. That’s because when money-management tools become too user-friendly, a lot of folks have very little incentive to understand the data being made available to them.
For the financially undisciplined, over time that’s a surefire recipe for failure.
The big advantage of spreadsheets
For me, the more old-school, hands-on approach is the only way to go. I use my own custom-designed Excel spreadsheet because it forces me to actively manage my personal finances. It also gives me more control than using a Web-based site like Mint.
In fact, every January I give my readers a peek at some of that spreadsheet’s top-level graphs and financial breakdowns in my annual State of the Household post.
True, a spreadsheet is not as sexy as automated money-tracking Web-based applications. But it’s the same tried-and-true method I’ve been successfully using to track my income, net worth, and expenses for more than 15 years now.
Here’s just a small portion of the Excel worksheet for my household expenses in 1999…
Although the custom Excel spreadsheet I developed was quite simple in the beginning, it has grown in detail and complexity over the years, with pie charts and graphs that clearly show the results of our household spending and current trending patterns.
Today, my spreadsheet breaks out our household expenses into 13 major categories and 50 subcategories. The major categories include:
- Medical and dental
- Automobile expenses
- House expenses (excluding the mortgage)
- ATM withdrawals
And a few more quick tips…
- If you’re just starting out, it’s important to make sure you set aside about an hour or so at least once per month for reviewing your checkbook, receipts, and/or credit card statements and recording your expenses in your spreadsheet.
- By frequently updating your financial spreadsheet, you’ll not only be able to quickly catch any potential errors on your billing statements, but you’ll also keep from falling hopelessly behind on your record-keeping duties.
- If you’re not an expert in Excel, there’s no need for despair. Microsoft has scores of budgeting worksheet templates for you to download and modify to suit your needs. In fact, their “personal budget worksheet” template has been downloaded more than 3.6 million times.
- If you’ve never used a spreadsheet, don’t be intimidated – they’re not hard to use! Yes, spreadsheets are extremely powerful tools for those who know how to take advantage of all they have to offer. But for most folks, the basics needed to properly track expenses can be learned in less than 30 minutes.
- If you don’t want to spend money on a spreadsheet application such as Microsoft Excel, you can try the free equivalent from OpenOffice. I’ve used OpenOffice before and it’s an extremely capable alternative. You can also take advantage of the free personal finance templates provided by Google Docs.
- Once you’ve effectively disciplined yourself to always spend less than you earn, tracking expenses becomes a viable alternative to budgeting that allows you to focus on optimizing your finances in order to get the most bang for your buck.
- And last but not least, remember this: In the end, it doesn’t really matter what tool you use. What is important is your commitment to actively manage your finances.