Today, I want to talk about different kinds of tools which allow us to track our income and expenses and understand where we are heading on our financial journey. Our goal is to keep our income higher than our expenses so that by the end of the month (or another period of your choice) we have some money left. This means we want to have a positive cash flow every month to grow our net worth which is our ultimate goal.
There are two types of budgeting tools: manual and automatic. Manual tools mean that we have to do some work ourselves, while automatic ones mean that a computer, an application, or a service will do it for us.
1. Pen & Paper
Let’s start with the most basic manual tools available—pen and paper. You can get a small notebook and a pen or a pencil to carry it with you everywhere and write down each of your expenses there. Even if you don’t plan to do it for a long time, this is a powerful exercise because it brings self-awareness and makes you more mindful of how much money you spend every day.
Writing things down is a great mindfulness and self-awareness exercise in general. If you start working with a nutritionist, before they suggest any changes to your diet, they will ask you to keep a journal of what you eat every day for some time (usually, at least for a week). Once you see the nutritionist at your next appointment, they will review this list and start making recommendations.
If you go to psychotherapy, your therapist will ask you to keep a journal of your activities and your mood at every hour. This will help you to both understand what types of activities make your mood better or worse.
A business coach that helps you with time management will ask you to keep a similar journal for a while and write down what you did every hour, preferably accounting for every minute of the day. A time-management journal will help you understand what activities are “black holes” of your time (you spend much time on them, but they bring you very little to no result and do not align with your goals). The same principle applies to budgeting, only this time we are looking to identify your spending habits and your monetary “black holes”.
If you pay for many things in cash, instead of carrying a pen and a notebook on you at all times, you can collect your receipts and categorize them at home at the end of the day or every couple of days. I would suggest doing it every day. When you do this every day, it becomes a habit, instead of a one-off activity that you do randomly here and there.
2. Electronic notes
If you don’t like writing things on paper and prefer to keep your notes electronic, you can keep track of your expenses in the Notes app on your phone.
Also, if you don’t like carrying paper receipts with you, you can take pictures of them with your camera and save them in Evernote or Adobe Scan. Both apps are OCR (optical character recognition), meaning that they recognize text from images automatically, thus making your notes searchable.
There is a multitude of different apps for both iOS and Android that allow you to manually input expenses but I haven’t used them and I don’t plan to review them.
3. Spreadsheet (MS Excel or Numbers)
The other option for people who prefer their notes in electronic format is to use a spreadsheet application like Excel or Numbers. They both have budgeting templates available. You can find Excel templates online, and Numbers has some built into the app. I’m a long-time Mac user, and I haven’t opened Excel in a while. So, there may be some built-in budgeting templates there already, but I’m just not aware of them.
Then you can go to your online banking and either download all transactions for the last month in a spreadsheet-compatible format (like .XLS, .XLSX, or .CSV) or fill out your spreadsheet manually.
I used to download my expenses from my online banking every month, and budgeting and expense tracking was a once-a-month activity to me. The advantage of this method is that you don’t have to type so much. You need to reformat your data and categorize your expenses. The disadvantage is that at the end of the month you may not remember what some expenses were for and be unsure how to classify them. You also don’t see how you track every day. This is why now I keep track of my expenses in Numbers with this template and type them and categorize them every day. I prefer this method because it gives me more flexibility in creating my own categories than most automatic tools, and I can see the bottom line every day automatically as opposed to pen and paper or electronic notes.
When you’ve decided on your favourite manual budgeting tool of choice, you can proceed to actual income and expenses tracking. Preferably, it would be best if you tracked expenses using the following columns: date, the name of transaction, amount, and category. For example, your expense tracking can look like this:
01/12/2019 - Starbucks - $5.00 - Tea & coffee
You can name your categories however you want, just make sure that they make sense to you, and that you are consistent in putting similar items into the same category. Also, if by the end of the month you see a significant amount of money spent in some general category, and you want to know exactly what kinds of expenses they were, especially if it’s something you are looking to cut down on, you can review your notes and analyze items in this category. Then, next month you can make more specific groups within this general category (or subcategories). This is particularly important with mysterious “Miscellaneous Expenses” category where we tend to put many things we don’t know how to categorize.
One example of going from general to more specific categories is that instead of having Shopping category where you write all your variable expenses for something you buy except for groceries or transportation, you can be more specific this time and divide your items into Clothes, Electronics (or gadgets), Books, Household Items (or Cleaning Supplies), and so on. Another example is let’s say you have a general Health category, and this month you want to be more specific. You can create such categories as Drugs (aka medication for my readers not from North America), Vitamins & Supplements, Massage, Chiropractor, Acupuncture, Physical Therapy, Dentist, and so on. I hope now you get a general idea.
It’s important not just to track expenses but to do the actual budgeting every month. You can start in the beginning of the month with writing down your fixed expenses like rent or mortgage, different utility bills, memberships and subscriptions. They are easy to determine because they don’t change from month to month. Then you can write down your estimates (or “guesstimates”) for your variable expenses. Then, at the end of the month, once you wrote down and categorized all your expenses, you can compare your budgeted amounts to the amounts you actually spent and hopefully make some useful conclusions.
At this point, you can adjust the budgeted amounts for different categories of variable expenses to make them more realistic. If you think that some expenses vary from month to month significantly, you can track your expenses in that category for several months more (3, or 6, or a whole year, whatever makes sense to you), come to some average amount and make it your budget amount for this category.
You can also have some expenses that don’t happen every month. Some of them you expect as birthday or Christmas presents for your family and friends, and others can come out of nowhere. You can get a wedding invitation, and it’s not like your friends and family get married every month. Your car or some other piece of technology can stop working, and you may need to either repair it or replace it. Also, I hope that all of us stay healthy, but accidents happen. For example, two years ago I was moving to a new place, and during that time I severely sprained my neck. As a result, the neck muscles inflamed, pinched the nerve that went from my neck to my right shoulder and down to my right arm, and I was in a lot of pain. I had to see a chiropractor for two months. Those were unforeseen expenses for me that luckily don’t happen every month.
Once you track your expenses for some time, you will get a better understanding of these variable accidental expenses, and you can even include them in your budget.
If you have been budgeting for a while, I’d like to hear from you. Please let me know what tools you use in the comments.
I will talk about automatic budgeting tools in my next article.