Now that we are almost three weeks into the new year I suspect the enthusiasm for some of the resolutions made three weeks ago is starting to wane. I hope I can put some of that enthusiasm back into some personal finance related resolutions.
The first resolution that I want to discuss is simple expense tracking. I believe that expense tracking provides the foundation of any personal finance planning. Without having a solid understanding of your cash flows, how much money comes in and where that money seems to disappear to so quickly, there isn't a context to frame all the major aspects of financial planning.
The first thing that expense tracking does is point out where money is being wasted. Are you spending $80/month on a cell phone contract for a cell phone that you only use for emergencies? Is your habit of getting a coffee on the way into work every morning (when you could drink the free coffee at work) in addition to buying lunch everyday showing up as a $100/week cash withdrawal (that's a little more than $400/month)? Is that gym membership that you never use (there's another resolution) really worth that $60/month? Do you keep on paying it hoping you will feel guilty enough to actually go to the gym? Are you spending over $100/month for cable/satellite TV? How many of those extra channels (that all seem to be running episodes of the same shows) do you actually watch? I know you got that HDTV for Christmas last year but do you really need to pay that $12/month to rent the HD decoder box thing? For that price you could get a 1-DVD at a time unlimited rental plan with Zip.ca (you pay $11/month and like Netflix they mail you DVDs that you want to see and you mail them back when you are done and then get the next one on your list).
The second thing that expense tracking does is allow us to realistically estimate those once-in-a-while-but-not-every-month sort of expenses. How much did you spend on car maintenance last year? How about the year before that? Were those expenses surprises when you actually had to shell out the money for them? I'd be willing to bet that from year to year your car maintenance costs are fairly consistent (except in the year where your car crosses the 100,000km odometer mark, that year will be a little more expensive). How about gas for the car? Did your gas expenses go up last year? Have they gone down in the last couple of months? Do you expect those to go up again as we get closer to the summer driving season?
The most important thing that expense tracking does is give you information. The information that you get from tracking expenses is priceless. What happens if your spouse gets laid off? That emergency fund that you have put a little bit of money in (you have started a TFSA for that, right?), how many months of living expenses will that cover? What are the first things that you could cut out of your monthly expenses if your household income dropped for some reason? Long-term expense tracking (over 5 or more years) should start to give you good insight into what your expenses might look like as you approach financial independence. If you track your expenses you should get a very good feeling for when you will actually achieve financial independence. Once your investments start generating greater absolute returns than your annual expenses then depending on the stability of those returns that is pretty much the definition of financial independence (which some people like to call retirement but there isn't anything that says that financial independence means stopping work although it could).
So tracking expenses seems like a daunting task, doesn't it? You have to go out and buy some software and then spend hours in front of the computer trying to figure out how the software works and entering in all your bills. Or you have to save all your receipts and plug all the exact amounts into some software that comes up with some strange numbers that you don't understand. It doesn't have to be that complicated. I have a made up a fairly simple spreadsheet that you can get from here: Expense Tracking Spreadsheet
. There are pre-defined categories for spending categories in that spreadsheet which you can modify to suit your situation. The numbers that you enter in that spreadsheet don't have to be exact. If you start by just trying to track to the nearest ten or twenty dollars what you are spending for one month I think you will be able to find some areas that you could adjust your spending slightly. At the very least after one month of expense tracking you will have a better idea of where your money seems to go so quickly. You will have the beginnings of the foundation you need for planning out your personal finances.