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You’ve heard it before – be sure that you track your expenses! But why would you want to do that? And is there an easy way to make it happen?
When most of the mainstream media in the financial space talks, they want to push you toward using your income as a gauge on how prepared you are for retirement.
You’ll hear various numbers thrown around such as that you’ll need 80% of your pre-retirement income to make it through retirement.
I get it. That’s fitting for a lot of the general population. Most folks just tend to spend everything (or more than) they make. They’re probably not on track for retirement so the advice isn’t terrible.
However, you’re likely reading this because you’re not aiming to be part of the “most folks” group.
You’re probably learning about the idea of FIRE (financial independence / retire early), already on the path to it, or you’ve successfully retired early.
And if that’s the case, that basic advice from the general media is going to be completely wrong for you.
Your personal savings rate needs to be much higher to make this happen triumphantly. Your income will help you get there, but if you’re saving 50% (or more) of your pre-retirement income, why would you need to plan to live off 80% of your working income?
In other words, your income isn’t the right measurement for your early retirement goals – your expenses are the key metric to understand. And it’s those expenses that can help you understand how much you’ll need later in life.
The expense-tracking problem
You’ve probably read about the importance of needing to track your expenses, but that not always the easiest thing to do.
If you’re manually keeping up with your finances, you have a good chance of missing some expenses.
If you’re using software such as Quicken or Mint, it’s very possible that something gets categorized incorrectly.
Empower (formerly Personal Capital) is free and an excellent tool for seeing your net worth and helping you possibly save tens of thousands of dollars in fees alone. In fact, it helped me save over $50,000 in fees in just over a 10-year period.
However, it’s not the best tool for tracking your everyday expenses.
The problem is that knowing how much you’re actually spending can be a real pain in the butt. In addition, it’s going to be a time-consuming process that you need to keep up with on a regular basis.
So how can you quickly track your expenses?
Ah, so glad you asked. I love my Quicken and Empower (formerly Personal Capital), but I wanted an easier way to figure out a number to base my expenses around.
I was looking for more of a “back-of-the-napkin” method to use periodically. So here’s my answer…
Subtract your after-tax savings from your net income to give yourself a quick estimate of savings.
To put it another way, your money flow is either income or expenses. Since you typically have a lot fewer savings avenues than you do expense payees, wouldn’t it just be easier to calculate what you’re saving? Then you can just subtract that from your after-tax income.
Boom! A quicker method of figuring out your expenses!
I would recommend figuring out your numbers over a longer period of time such as a year since most of us have some expenses or savings that don’t come into play every month.
To make the calculation work correctly, you need to remember that we’re simplifying and using after-tax dollars. So, any pre-tax dollars saving contributions on your paycheck shouldn’t be included. In other words, leave accounts like your 401(k) or HSA off this.
It’s time to track your expenses, Joe!
Let’s do an example calculation with our fictional guy named Joe.
Let’s say that Joe is married and he and his wife contribute a combined total of $500 per month to a regular savings account. That comes out to be $6,000 per year – pretty good start, Joe!
They also contribute the max to each of their Roth IRA accounts. At $5,500 each (for 2017), that’s a total of $11,000.
So outside of any pre-tax lines on their checks (401(k)s, HSA accounts, etc.), they’re saving an additional $17,000 for the year ($6,000 + $11,000).
Now Joe just needs to take the net earnings amount from each of their paychecks for the year and add them together. In our example, we’ll say that the combined amount is an even $100,000.
The hard work is out of the way. Now we just subtract the saving contributions from their net income:
$100,000 – $17,000 = $83,000
So Joe and his wife are spending a ballpark figure of $83,000 for the year. Come on, Joe – it’s time to get your expenses down and start saving some more dough!
It’s as simple as that.
The bad news is that at first glance they need to come up with enough retirement savings to cover $83,000 per year.
The good news is that this also includes their mortgage, which they plan to have paid off before they retire. So that’s a big line item they’ll be able to subtract off their expenses every year.
In this case, we’ll say that they pay around $2,000/month on the loan. That comes out to be $24,000/year. So really, they can concentrate on a general figure of around $59,000/year.
Now Joe can get a quick idea of how much money he would need for retirement if nothing in his lifestyle changes. He can then apply a formula such as the popular 4% rule to get to that number.
I still need to write a post on the specifics of the 4% rule. However, the very rough idea is that if you have a portfolio that is 25 times your expenses, you can quit your job.
Using this formula, that would mean Joe and his wife would need a portfolio of $1,475,000 ($59,000 x 25) to sustain their lifestyle in retirement.
That could be good or bad depending on what they already have stashed away and invested. Regardless, at least they now have a starting point in their retirement planning.
Again, these are all just rough numbers, but the ability to track your expenses easily can tremendously help you determine your early (or traditional) retirement goals much easier.
It can also help you figure out if you’re spending too much now. Most folks could never even tell you what their expenses actually are. Just seeing that number alone could be a solid wake-up call for many.
Maybe you have a lot of unnecessary fat to trim and don’t even realize it. Really, the only way to know for sure is to track your expenses.
I use Quicken religiously (and toy with Mint and Empower (formerly Personal Capital)). With how obsessive I am with Quicken, looking at my expenses is relatively easy to determine.
However, having another method to be able to quickly see what your expenses are can come in pretty handy.
Sure, it’s not going to be a perfect number and you’ll have numbers like your yearly tax bill (or return!) and other factors that could affect this. But for an easy way to track your expenses, this can be a method that’s hard to beat!
Do you track your expenses? Does this seem like an easier way to get a quick gauge of your expenses?
Thanks for reading!!
8 thoughts on “An Easier Way to Track Your Expenses”
I manually update my Excel spreadsheet and use Personal Capital for a quick overview. It works really well for us, but I’m a bit obsessed about our expenses. I think people should try using a plain spreadsheet for a couple of months to see if they can deal with it. It works really well if you’re serious about personal finance. For non obsessive people, your method is probably better.
Sounds like a great system, Joe! As much as I love Excel, for some reason I never went down that path for expenses. I’m thinking that’s because of Quicken… it rules my life!
Like you mentioned, though, if you’re not obsessed with every penny, having a quick back-of-the-napkin method to be able to figure out your total expenses at any point in time could be helpful for a lot of folks.
Hey Jim, a great “high level” way to estimate your spending, which is more than 92.7% of Americans do (just guessing). I tracked EVERY penny in a spreadsheet for a 10-month stint (wanted a year, but just couldn’t handle the pain) to get a very realistic spending plan for our retirement planning.
For the majority of folks, a high-level estimate is sufficient. Thanks for sharing an easy way to do the math!
That’s impressive, Fritz! I keep thinking of how painstaking that would be, but in all reality, that’s the same thing I’m doing with Quicken. I enter every receipt and bill payment I make as soon as I get them and then let Quicken reconcile them once they’re posted… I have mental problems.
But, like you said, the quick math should get most folks pointed in the right direction.
Sadly, I’m too much of a perfectionist to keep it to a simple calculation of total spending and saving. I think it’s a great simple trick though! Like you, I track every penny and like to have my budget up to date at all times. Good thing there are nerds like us out there, right?!
Haha, definitely true, Kathryn! Us money nerds gotta stick together! 😉
Great way to get people started, it can feel overwhelming at first if you have never looked at your expenses before. I think we forget sometimes how overwhelming certain tasks are to others , like keeping track of expenses.
I love Excel and spreadsheets so I go nuts keeping track of everything but I have to admit the expense tab is not my favorite.
Great point, Caroline – the hard part for those newer to the game is getting a system in place and keeping up with it. But once you have something in place (like Excel) it becomes much easier and can make managing your finances tremendously easier to do.