Living Expense Tracking Methods

Many people do not track their living expenses and do not understand the magnitude of their consumption. Failure to monitor your consumption expenditures means that they are flying blindly regarding their future finances. If you do not understand how much you spend and how much you are saving and investing, you simply do not have a financial plan. This situation dramatically increases your family’s long-term financial risk.

I strongly recommend that people adopt some form of expenditure tracking to increase their understanding of their annual ordinary living expenditures. A variety of manual and/or automated methods can be used to track expenses.

In general, there are at least three primary methods of tracking ordinary living expenses on either an annual, quarterly, or monthly basis. These methods are more or less time consuming, and each provides differing levels of information about your consumption. Furthermore, these methods can have ancillary efficiency benefits to your ongoing family financial management process.

Any of these three methods could provide the information needed to validate your total annual ordinary living expense assumption for purposes of your long-term financial planning using the VeriPlan lifetime financial planning tool. The following discussions summarize these three methods, and I recommend that you choose the one that seems to suit you best.

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A) Consolidated Account Cash Flow Expenditure Tracking

To track expenditures via cash flow analysis requires that you funnel all your expenditures through one or just a very few checking, credit, and debit accounts so that you have more consolidated records of your family’s financial transactions. The greater the number of accounts, then the more time consuming it is to remove inter-account transfers. Then, on either a monthly, quarterly, or annual basis, you simply measure the net cash flows and compare beginning and ending balances. The result is the net cash flow for the period.

For example, in its most simple form you would have one checking account and one or two credit/debit accounts, through which you paid all of your ordinary living expenses during a year. You could automatically deposit your net paychecks into this checking account, after your gross pay had been reduced for income tax and other tax withholdings, regular investments, etc. This consolidated account would be dedicated to paying only your ordinary living expenses, through 1) checks, 2) monthly payoffs credit card bills (in full, of course), and 3) cash for spending money.

Using this method, all you would need to do is take the beginning cash balance, add paycheck deposits, and subtract the ending balance to arrive at the ordinary living expenditures for the period. Of course, for whatever period you chose (monthly, quarterly) there would be a few bill payment timing issues. However, these timing issues, would tend to average out over the periods.

To make this ordinary expense cash flow measurement method work, you would need to pay other mortgage/debt payments and investments from a different account. Presumably, your ordinary expenses would be much less than your net earned income. As the cash balance in your ordinary expense checking account rose, you would periodically transfer cash to an interest bearing money market account periodically. Then, this interest bearing account would pay your mortgage, your debts, and enable you to make further make more investments – either automatically at regular intervals or on an ad hoc basis.

This cash flow method has the advantage of simplicity and requires only that you pay attention to which accounts you use for which types of payments. However, this method only provides an aggregate measure of ordinary living expenses and does not allow you to understand in detail where you are spending your money.

Note further that it is really not necessary to have a separate account to make mortgage, tax, and investment payments. If you use a single account, you would just need to adjust for any such “non ordinary living expense” payments, when you do your cash flow analysis. Nevertheless, using separate checking for ordinary living expense payments and a separate money market account for all other payments does have certain virtues.

While checking accounts do not pay interest, keeping a small cash buffer in a checking account can help to avoid periodic account fees and buffer your from overdraft charges. Periodically, as your cash builds up, you can transfer funds to an interest bearing money market account out of which you can pay mortgage bills and real estate taxes and make investments.

B) Receipt Collection and Addition

Alternatively, you could keep all receipts and total them on a monthly, quarterly, or annual basis. This method is more work than the account based cash flow analysis method discussed above. Receipt tracking requires that you be conscientious about collecting and totaling ALL of your receipts. This includes tracking the checks that you have written from your checkbook.

This receipts tracking method also would require you to track cash expenditures. You might simply make notes for cash expenditures (above some trivial minimum) and treat these as receipts. Otherwise, you could just use a very simplified cash flow measurement for your cash payments, such as adding up monthly ATM cash withdrawals.

While this manual receipt collection and totaling method requires more time and more conscientiousness about keeping receipts, it also can have more benefits. You can sort receipts into standard expense categories and keep a total of these categories.

Simple spreadsheets would allow you to track both expenditures within categories and total expenditures over time. Categorization of expenditures is helpful, when understanding fluctuations over time, and deciding where to reduce expenditures, if you sought to do so because your savings rate was below your expectations and plan.

C) Use of an Automated PC Expense Tracking Program

This third alternative can be more time consuming, but it can provide even more expense tracking and payment automation benefits. Overall, the use of a fully automated expense monitoring and bill payment system can be more efficient than a manual system.

There are a number of PC based automated personal expense tracking systems available. The leading one is Intuit, but there also are Microsoft Money, Mvelopes, and others.

For people who are very comfortable with computer based and Internet applications, these automated programs provide a wide variety of benefits. Regarding Intuit, for example, ordinary living expense tracking is almost a side benefit of using Intuit to manage your short-term cash flows and accounts. In addition to logging all your transactions, you can use its ability automatically to connect to your online financial accounts and to integrate your checking, savings, credit, and investment accounts for a unified view on your PC.

Learning an application like Intuit takes some time, and time is required for ongoing maintenance. Nevertheless, the automated integration of all your accounts, and the ability to make electronic bill payments and other financial transactions, can easily compensate for the learning and ongoing time commitment. People spend a large amount of time and postage manually paying bills by mail.

Furthermore, bill payments through the mails might not be delivered properly. In addition, sometimes mailed payments are not processed properly by the financial institution that receives them. These error situations are irritating and time consuming to correct. Electronic payments can be more efficient and more timely and can have a lower error rate.

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