My $121K Mistake

Personal finance is, personal.  This is a phrase you will see me type many times.  In many cases, a financial move that is right for one person may not be right for another.  Some people start their own business while others prefer to work for a business.  Some people drive a shiny new SUV while others choose a 10+ year old sedan.  Some like to invest in stocks while others prefer mutual funds or real estate.  These different choices and many more could all be part of a Winning Personal Finance plan.  Unlike these examples that are personal preference, everybody needs to track their income and spending.

I’ve always been a student of personal finance and think I’ve earned a grade of “A-” so far.  The minus is because at one point, as recently as 2015, I slacked on tracking my spending regularly.  At that time in my life, I was not really focused on any financial goals.  I was not saving for a house nor had I started focusing on the fast track to financial independence.  This mistake is also why I think having goals is so important.  My wife and I were living on two healthy incomes and we were definitely saving some money.  However, we were not saving nearly as much as we could have because our spending was out of control.  For example, in 2015, we spent $13K shopping and $11K on restaurants, a total of $24K.  Considering I can hardly remember any of the purchases or meals, how much of them did we really need?  Let’s say we did not make half of those expenditures ($12K) and invested that money.  Let’s also say that we earned an 8% annual return on that savings over the following 30 years.  This would have yielded us almost $121K by 2045!  If at the beginning of 2015, somebody had offered me $121K in 30 years or spending an EXTRA $12K on restaurants and shopping that year, I most certainly would have taken the former.  Note that this example is based off of only two spending categories in one particular year.  Imagine the potential impact on all categories over a longer period…

The potential savings from tracking your income and spending are unbelievable and each of us NEEDS to do it.  Notice that I did not use the “B” word.  Tracking income and spending is different from having a budget.  Tracking income and spending is looking at what has already come in and gone out.  A budget, is looking at what you are expecting to earn and planning to spend.  While often tracking and budgets often go hand in hand, I believe you NEED to track your spending while I think you SHOULD have a budget.  A budget is nice to have but it’s just a projection, you can put anything you want in it and end up doing something different entirely.  To me, holding yourself accountable to only spend based on your personal values is more important than having a plan for your money in advance.

If you track your income and spending diligently each month and are okay with the way things are going, great!  You can stay on your current path.  If you are tracking and you start to see a pattern you don’t like (you are not saving as much as you wanted or your have tripled your expected shopping spend) you can fix the problem before it gets out of hand. This is the key.  By tracking your expenses monthly, you can find a leak before it gets out of hand and fix it.

The real beauty of tracking your spending is a hidden benefit.  If you know that you are going to be looking closely at your spending at the end of a month, it might make you hesitate before making a purchase.  Think about it, without tracking, if you want a new pair of jeans that cost $200, you pull out your credit card and poof you have them without thinking twice about the cost.  Instead, if you are tracking your spending, you know that at the end of the month when you are looking at your numbers that a $200 jeans purchase will stand out.  When you are about to purchase those jeans, you do a double take trying to figure out if “future you” evaluating your monthly spending will approve of the expense.  If you pass the “future you” test, and are on track to accomplish your goals, go for it.  The hidden benefit is that that quick, “future you” hesitation may help you realize that you already have 12 pairs a jeans and that $200 would be better off going to a vacation fund or your kids college savings.

It does not matter if you track your income and spending with pencil and paper, in a spreadsheet or with a tool such as Quicken or Mint.  Personally, I use a combination of Mint and a spreadsheet.  Mint is a free service that links to your bank and credit card accounts.  It automatically aggregates and categorizes all your transactions in each account.  It even allows me to re-categorize transactions as I wish. I like that this process is automated and I can spend my time analyzing the data rather than pulling it together.  It should take you less than 30 minutes a month.  If you have spouse, do it together or have a regular discussion about it for additional accountability.

If you are tracking your spending, please share your method in the comments.

Do you have a “I was not tracking horror story” also?  If so, please share in the comments below.

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