In an article I wrote in April 2019 (You Are On The (Retirement) Clock!), I propose that the best 1st step to take is to track your expenses. The premise being that until you know what and how you spend, you really can’t determine how much you could be saving. You also don’t know if you can retire if you don’t know how much you spend.
Over the years, I’ve tracked my expenses in detailed spreadsheets and now I use Personal Capital. It’s been a journey trying to learn what’s important to track. I’ve concluded that it really depends on what stage you are at (i.e. young, middle-aged, retired) in your life.
The important thing is to track your expenses in a way that works for you and your goals. Tracking just to track doesn’t do anything if you aren’t willing to make teaks along the way. For example, a person spending $700 monthly eating out at restaurants needs to be willing to get that under control.
Our First Attempt
In 2006, we were struggling to pay our bills. Expenses were hitting us from all directions and my wife had to pick up a part-time job. The issue – we had no idea where our money was going. Our net worth at the time was about $250,000. Most of that was home equity, which was about to get crushed due to the Financial Crisis.
For about 4 years (2006-2010) we tracked our expenses in a detailed Excel spreadsheet. During this time, we knew were our money went and probably made some subconscious decisions to not splurge at times. And we focused on paying down credit cards, which was huge.
“The issue – we had no idea where our money was going.”
Probably the most important part of starting this process was that we were communicating. As a couple, communicating is the most important issue to solve. At a minimum, we were talking about our financials and holding each other accountable to our spending.
At the same time of tracking expenses, we also tracked our net worth too. The combination of knowing where your money is going plus seeing your net worth is a motivator. It got us to start thinking about the future and being more intentional with our money.
Our Tracking Today
When we first started tracking expenses, we had 31 categories. It wasn’t pretty but we knew where our money was going. Today, we have only 12 categories and I can see that dropping to about 9-10 when we retire.
Today, everything we do is done with Personal Capital – a wonderful tool to track wealth and expenses. I do transfer their data into a spreadsheet because I can manipulate that data easily. Plus, I still have items that come out of my paycheck (healthcare premiums, disability premiums, etc…) that don’t show up on Personal Capital.
Today, everything we do is done with Personal Capital – a wonderful tool to track wealth and expenses.
Today, we focus on year-over-year monthly expenses so that “red flags” can be easily identified. For example, if our monthly restaurant expense is higher we recognize and make decisions to reduce the category. There is no budget but we do have goals to reduce our controllable expenses. We are just trying to be smarter about how we spend our money … it’s certainly much more intentional now.
Our Future Tracking
The future of our tracking will be understanding controllable and non-controllable expenses. Why is this important, especially in retirement? When the markets are down, controllable expenses are the way to safeguard that you don’t outlive your savings.
As you can see in the chart, the Tech Crash (200-2003) took the S&P 500 about 7-8 years to fully recover. The Financial Crisis (2008-2009) took the S&P 500 5-6 years to recover.
This is critical because when a market is down for 3 years like it was from 2000-2003, it took another 4.5 years to get back to even (excluding dividends). Many gurus advise to keep 1-3 years of expenses in cash so we don’t have to sell stocks at the bottom.
The issue with that advice is it might take 5-8 years to recover from a significant market downturn. And 1-3 years of cash won’t do much for you when you need money to fund your lifestyle.
The answer to this issue is to identify and reduce your controllable expenses. If I’m spending $20,000 per year on travel then maybe I only spend $5,000-$10,000 per year. The goal is to not outlive your money and the best way is to be fluid and flexible with your expenses.
Summary
Tracking expenses is number I on my list of actions to get your finances in order. However you decide to do this, I’d recommended getting started with Personal Capital. It combines wealth management with expense tracking and it’s easy to use. I mean, isn’t that why we track expenses … to build more wealth?
Bottom line – you need to know how much you are spending before you retire. You can either use a rule of thumb – like 70%-80% of final year income – or know exactly how much you are spending. For me, it’s not even close. Actual and forecasted expenses by category is the much more reliable method – you should track your expenses.
Thanks for reading!
Mr. TLR