Living in this Expensive World — Part Three — Expense Tracking and Budgeting
I’ve said it before, and I’ll say it again: It’s an expensive world out there. Everywhere you turn, you hear conversations about how expensive it has become just to buy a gallon of milk, let alone pay for the rest of your groceries or even the rent or mortgage.
In my article Living in this Expensive World — Part One — Redefining Living Wage I talked about what a Living Wage actually means and tried to get us all on the same page. In the second article, Living in this Expensive World — Part Two — Living within Our Means, I talk about spending less money than we make. In Part Three, I’m going to be talking about the continuation of Part Two, where I will focus on Expense Tracking and Budgeting. Let’s peel this onion so we can learn to live in this expensive world.
I’m going against the grain a bit here as I discuss money instead of my passions in software engineering and tech. This article is something I think we need to discuss in light of the recent changes in the economy and inflation.
Foreword
Before I dive into the main subjects, I want to first talk briefly about a common theme I see popping up across the web. I talked about this in Part Two under How to Live Within Your Means, but I want to mention it again.
I have heard the phrase “You can’t budget your way into a Livable Wage” many times. In recent years, I have heard it more frequently. In my experience, this thought seems to come from someone who refuses to even try expense tracking, much less budgeting. I want it to be clear that the phrase is true, and that I’m in no way trying to diminish the statement.
What I do want to say though is that Expense Tracking and Budgeting are not about tracking how much money you MAKE. While yes, they do this, that isn’t their real purpose. Their real purpose is to track how much you SPEND. There is a mentality difference that has to be established here that I believe many fail to understand. When you start either option, you are not going to suddenly find yourself in your Comfort Wage. Instead, you are trying to balance your Semi-Comfort Wage and break that Paycheck to Paycheck cycle.
Expense Tracking
Most everyone I’ve ever talked to at least had a vague idea of what Budgeting is. When anyone starts talking about money, Budgeting frequently comes up. It’s interesting to me that Expense Tracking doesn’t get more love. Expense tracking is exactly what it sounds like: You track all your expenses, without regard to where your future money may go.
Expense Tracking isn’t a new concept. The term “Balancing your checkbook” is expense tracking. Every time you fill out a check, you do the math to see how much money is left to spend in your checking account and record this in your checkbook. At the end of the month, when you get your bank statement, you compare it to your checkbook to reconcile that the amounts are the same.
Let’s be honest though, that’s quite boring with all the advancements in technology. Technology has made it extremely easy for us to track our expenses. From budget apps, double ledger journals, or even good ol’ notepad, there are plenty of ways to track your expenses.
The simplest option is Google Sheets or Microsoft Excel. If you don’t have internet or Microsoft Office, go to a Library and download Open Office, a free competitor of Microsoft Office. If you want to get fancy, you can also use GnuCash, an open-source software for double ledger accounting. I use You Need a Budget (YNAB). In the end, it doesn’t matter what you use, so long as you use something.
The idea of expense tracking is to monitor what money you are spending and where you are spending it. Create categories that make sense for you. For example, have a category for Eating Out, Shopping at Target, Electricity, Car Insurance, or whatever additional categories you can think of. Don’t worry about creating them all now. Only focus on what you are spending right now to get started. Once you start tracking your spending, you will start to realize things you never realized before.
I once ran Friday Night Magic at a local game store. It cost $5 to play, but since I was running it, I got to play for free. When I started expense tracking, I learned that within a few months, I had spent close to $1000 in that store, only going once a week. This was a wake-up call for me. Another time, I was tracking my eating out for lunch and realized I was spending an average of $400 a month just to eat out at lunch during the workday. I also had a friend once start using YNAB to track their expenses, and they learned that they were spending $100 a month on just beer.
The debit card has made it so easy for us to spend money without actually paying attention to what we spend. We end up using our account balance as the trigger to not spend money. As our balance gets lower, we spend less. When our balance is higher, we spend more. This is because we don’t have any sense of actual ‘loss’ when we use the debit card. By using expense tracking regularly, you will start to learn far more about your spending habits and will start to see places you can improve.
One of the beauties of proper expense tracking, is you end up being more hands-on about your spending habits. Simple things, like getting Starbucks every day for work, will start to add up. If you are spending $5 a day at your local coffee shop, that’s $25 a week or $100 — $125 a month just on a cup of coffee. Now, imagine if someone else in your household is doing the same thing, something I’m sure is common in the big cities. That means you are spending $200 — $250 a month. If you make minimum wage in the US (currently $7.25 an hour federally) at 40 hours a week, you are netting about $1450 a month at most. You are spending 15% of your monthly paycheck on coffee!
To be fair, I’m not trying to imply that you should stop having that coffee. If it’s worth it to you, it’s worth it to you. That’s ultimately none of my business. The point of expense tracking isn’t to guilt you into not buying anything but to raise your awareness of what you are buying.
In the end, Credit Cards aside, you can’t buy anything if you don’t have the money to buy it. Raising your awareness through expense tracking is a way for you to understand what you are spending and be able to make decisions about what you can or should cut out so you can start saving a little money to break the Paycheck to Paycheck cycle.
Budgeting
I would be very surprised to find someone who isn’t even vaguely aware of budgeting. Budgeting is one of those things that is easy to say, but hard in practice. If you’re already expense tracking, then you are halfway to budgeting. All the concepts of expense tracking apply to budgeting. This includes the concepts around categories and the general idea of tracking anything you buy. Honestly, you can’t have budgeting if you don’t first have expense tracking. So if expense tracking and budgeting are different, what then is the difference? The biggest difference is going to be the planning aspect.
The easiest way to explain this is by talking about the “Envelope Method” of budgeting. To use the envelop method, you start by writing your categories on envelopes, one category per envelope. You then put cash in each envelope. When it comes time to buy something, you take the envelope with you. When you finally pay, you pay out of the envelope. When you have less money in the envelope than you are trying to purchase, you cannot buy it. You aren’t allowed to spend any more money. For example, if you put in $20 in the Eating Out category, and a meal costs $15, then you are left with $5. Since $5, isn’t enough to eat out again, you’re not allowed to eat out again.
To be fair, this is the ‘extreme budgeter’ scenario where you refuse to spend money out of a category because it is ‘empty’, even if another ‘category’ has 10 times the amount required.
In the end, “Budgeting” is 80% expense tracking, 15% planning, and 5% sticking to that plan. When you budget, you are paying attention to how much you spend and are working to ensure you don’t spend more money than you have available to spend.
Something I have seen when it comes to budgeting is that some people tend to treat it like a guilt trip. This simply shouldn’t be the case. No one should feel bad about getting their favorite coffee and a donut. I have no desire to see you live in depression over this. To this end, I highly encourage you to read You Need a Budget — The Proven System for Breaking the Paycheck-to-Paycheck Cycle, Getting out of Debt, and Living the Life You Want by Jesse Mecham. Jesse is the founder of You Need a Budget. In the book, Jesse talks about the “4 Rules” that you should live by when it comes to money. One of the things I love about the rules is that they open you up to a world where budgeting isn’t a guilt trip and you can start to feel comfortable with your Semi-Comfort Wage while you make the moves to your Comfort Wage.
Embracing Your True Expenses
I want to talk about the idea of “Embracing your true Expenses”. This concept is one of the four rules of YNAB I mentioned above. Embracing your true expenses is about acknowledging your long-term expenses.
Let’s imagine for a moment that it’s January. Every year, we buy our parents a $60 gift card to their favorite restaurant. That comes out at $120. Rather than hoping that we have $120 to spend at that time, we set aside $10 a month. By doing this every month, we will have $120 by the time Christmas rolls around, and there is no sweat to thinking about it. This is ultimately the heart of Embracing Your True Expenses. If we shift to car maintenance, it becomes not a question of “if” you will have an expense, but a question of “when”.
The reason I wanted to mention this specific rule of YNAB is because I feel this is the single easiest way to break the Paycheck to Paycheck cycle. While technically meant for budgeting, I feel it also can apply to Expense Tracking.
As you start to track your expenses more and more, you’re likely going to start making adjustments to your expenses in a way that makes sense to you. For example, you may decide that spending $100 extra a month on beer isn’t worth it to you anymore, so you simply don’t buy that anymore. Congratulations, you are starting to live within your means. That’s an extra $100 that can go to other things and start breaking that check-to-check cycle. The question becomes though, what do you put that money towards?
I’ve found that if you Embrace your True Expenses, and put that money towards those expenses, you’re going to start to break the check-to-check cycle naturally, without doing anything else. Let’s go back to the $120 example above. If you don’t spend that extra $10 a month, then by the time Christmas does come, your account balance is going to be $120 higher than it was previously. Of course, you are going to spend that money, but all the other true expenses are still sitting pretty in your account.
I want to take a moment to give a more realistic example. Let’s imagine for a moment that you have 6 subscription services (IE: Netflix, Hulu, etc) that each cost you $120 per year ($10 / month). That is $720 total. The first one is due in January, the second is due in March, the third is in May, etc. If you have no money saved up now but do start saving up the $60 a month ($10 per subscription per month), then after a full year, you will have $720 sitting in your account, waiting to be “used” for those subscriptions. That’s $720 extra in your account now, that won’t be spent till later. This means that over time, you have gotten $720 ahead of your payments by not spending that money. In other words, the first $720 you spend every month is money from last month, not this month. You’ve started to break that Paycheck to Paycheck cycle. That is to say, you aren’t going to use $720 out of this paycheck to pay for that stuff, you are going to spend the $720 you already have.
This is embarrassing to say, but worth saying. One of the scariest financial moments I have had was because I wasn’t tracking expenses. My wife asked me if we could afford to purchase something larger than our normal expenses. I made the mistake of looking at the account and seeing plenty of money to pay for that purchase, so I told her to go ahead. The next day after making that purchase, the house payment went through and it bounced because the previous purchase put us for less than the mortgage payment in our account. Had I been tracking our expenses correctly, this wouldn’t have happened. To make things worse, it happened a second time later that year. Needless to say, expense tracking has made it so this won’t happen again.
Conclusion
I hope after all that, you’ve got a good understanding of expense tracking and budgeting. Remember, they are about tracking the money you SPEND, not the money you MAKE. There is quite a difference here. Join me in Part Four, where I am going to talk about some tips and tricks you can use to help make it easier to live within your means. Finally, in part five, the last in this series, I will talk about how we go about getting a Comfort Wage so we have extra money to spend.
