012 Tracking Expenses

“What can be measured, can be improved.” – Peter Drucker

If you draw a salary, you tend to have a regular credit to your Bank account of roughly the same amount each month. In contrast to this inflow, you face a multitude of expenses that debit your Bank account, the timing and value of which may be uncertain. Consequently, while all of us may know how much we earn at the start of the month, our estimation of what is left over at the end of the month would be fuzzy. What we are even less sure of, is the nature of spending done through the month. While some debits from our Bank account may be building our assets (E.g., Investments in capital markets or payment for a home loan EMI), some others will be consumption related (E.g., groceries purchased or loans repaying depreciating asset purchases). One of the keys to accumulating wealth is to maximize investments and minimize consumption. To distinguish the debits from our account into these two categories, desirable and undesirable, it is essential we track our expenses on a frequent basis.

The primary benefits of tracking expenses are:

1. You gain an understanding of the volume, timing and categories of your money outflows and can therefore optimize or reduce some waste that you can identify on an analysis of your spending categories
2. You shine a light on expenses that are not monthly, such as car service, insurance payments, etc.
3. You can match your inflows and outflows, and arrange your finances to have money waiting when bills fall due
4. You can systematically increase the proportion of your salary that goes into investments once you have arrived at your investment/ savings rate

Traditionally, expenses used to be tracked with spending logs that had to be then tallied up at the end of a month. The advent of technology has enabled us to automate this activity and have a convenient analysis in the palm of our hands at any time of our choosing. There are many apps which track, categorize and summarize our spending for us available for free these days.

I have an Android phone, and one such app I personally use to track my personal finances is Walnut. The app reads SMS messages, remembers past transactions, categorizes transactions and can also provide downloadable excel files of all my expenses for any time period of my choosing. The iPhone version of the app does not have permission to read SMS, so I believe this app is of limited utility for iPhone users.

I would recommend the following considerations at the time of tracking expenses

1. Smartly bucket your spending. Having too few (or too many) categories may mask wastage and prevent you from generating actionable insights to optimize your spend
2. I recommend two categories for your asset accruals as well – Home Loan EMI and Investments. While 100% of your investments goes into building your assets, the home loan EMI amount is split into a principal component and an interest component.
3. You should target that the spending on your asset accruals should total up to at least 50% of your cash inflows. If your investment proportion is currently less than that, it is essential to have a plan to reduce consumption expenses so that you are hitting the 50% mark within a realistic timeframe. I would consider this 50% as a watershed mark, as this roughly means that for every year of working you are accumulating assets that allow you at least one year of free time.

Lastly, this act of tracking expenses would also set forth a virtuous cycle where you constantly seek to optimize your spending and investing to bring the countdown timer to your financial freedom closer to zero.