There’s nothing I love more than tracking the spend on my latest Death Star project on a spreadsheet. I love personal finance. And spreadsheets.
My friends and family know about my personal finance fixation and occasionally ask about the first step to take when trying to improve their personal finance skills. (I do surprisingly have a few friends, and my family didn’t have much choice about being related to me.) I still haven’t figured out if they are asking because they care about the answer, or because in their view, personal finance is the least boring topic I like to talk about….
The common assumption is that I’m going to suggest a budget as a first step. I don’t. A budget can be useful, but may not be for everyone. More on that another day.
The first thing a family (or individual) should do is track their spending. There is no point having a budget, or deciding to reduce your spending if you don’t know what your current costs are.
Tracking your spend is kind of like weighing yourself before considering a diet. If you don’t weigh yourself (track your spend), you have no idea of what your starting place is.
Most people who don’t track their spending are very surprised at what they find once they start tracking their expenditure. And if there are two adults in a family, it is virtually impossible for either adult to know where the family money is being spent.
Let me give you some reasons you should track your spending:
- Knowledge – it is very difficult to know what changes you should make to your spending habits, if any, if you don’t know where your money is going.
- Power – Knowledge is power, and knowing where your money is going gives you a sense of being in control. Once you know where your money is going, you can then target the areas to change.
- Foundation for a budget – its impossible to create a realistic budget that you have a chance of sticking to if your budget is unrealistic. And drafting a budget without knowing where you currently spend your money is likely to result in an unrealistic budget that leaves you discouraged after starting it.
- Live your values – we all have values that we aspire to in life, like the importance of travel, or of giving. Tracking your spending may help identify areas where your use of your limited financial resources is inconsistent with your values.
- Planning for retirement – one of my irritations with the financial industry is that when you speak with a retirement adviser about how much you need to retire, the first thing they ask is how much you earn. Completely irrelevant – and kind of like your Uber driver asking you how fast you wanted to go rather than where you wanted to go. What matters most is how much I spend – as I’ll be spending in retirement, not earning.
- Pick up fraud – if you don’t track your spending, you will not pick up potential fraudulent charges. I picked up a fraudulent charge on a credit card a few years ago that I would not have noticed if I hadn’t been tracking my expenses. It was only $50, but by identifying it early, I was able to have my credit card company cancel my card and issue a new one and reimburse me for the fraudulent charge. And identity fraud will negatively impact your credit score!
- Stop recurring charges that you had forgotten about – A friend bought Mrs C an annual subscription to a cooking magazine a few years ago. Anyway, the magazine continued to arrive after 12 months. Year after year. I asked my friend about this several times, and he said he’d only signed up for a 12 month subscription, so it was the magazine company’s error. Free Magazines!!! But we should have known better. Anyway, our friend was going through his credit card statements recently and yep, you guessed it, discovered a recurring annual charge, for the magazine. Thanks dude, for the gift that kept on giving. For 4 years.
- Share meaningful information with your partner and agree on priorities / a plan. Finance is repeatedly cited in surveys as the biggest cause of stress in relationships.
I also want to highlight one critical aspect to tracking finances, especially when you are doing this as a couple and need buy-in from your partner. The first time you track spend, there should be agreement that regardless of what you find, there will be no judgment. If the less frugal partner thinks that the exercise will be used as a tool to beat them over the head, they are not going to sign up for this.
That’s enough about tracking costs today. Next time we’ll get into some of the practical aspects of how you go about tracking your spend.
Right, I now need to get back to cutting some costs from my latest Death Star budget. Hmm, ‘thermal exhaust port protective cover’? Sounds redundant, lets get rid of that to make sure we have enough budget for a brand new top of the range TIE fighter.
