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Many people have this habit of keeping track of their expenses. While not an uncommon habit, it has transformed avatars in recent years. People used to keep track of their spending on paper. But now there are hundreds of free apps that will do it automatically. Just search “Expense Tracker” in your phone’s app store and you will see tons of these apps.
Watch out for exits
If you’re at the stage of life where you’re constantly running out of money at the end of the month, then you really need to track your spending for a while. After a few months of practice, you will have a better understanding of where your money is going. These can be basic, non-negotiable expenses, discretionary expenses, and some downright unnecessary expenses.
This bucket spending awareness is in itself a huge win for many. Now you can focus on cutting unnecessary expenses to have a surplus at the end of the month.
But is it enough to continuously monitor your expenses?
Will it help you reach your financial goals?
The answer is NO for both questions.
To achieve your goals, you need to save and invest. Is not true?
And that’s where investment (and goal) tracking comes into play.
You first need to figure out what your goals are and how much you need to invest to reach your goals.
And then, when you find you’re spending way more than you should to leave enough excess on the table, you need to track spending for a few months to figure out where you can cut back. Easier said than done, but it’s still an exercise worth trying.
How will all this unfold?
As always, let me use a very simple example to explain it.
Suppose your monthly income is Rs 90,000.
Target investment
He has two goals, namely (say) his son’s higher education, which requires an investment of Rs 15,000 per month, and retirement, which requires an investment of Rs 20,000 per month. So in total, you need to invest Rs 35,000 per month for all purposes.
You now know from experience that at the end of the month you will have just under Rs 10,000 left. In other words, your monthly expenses are around Rs 80,000.
So what to do now? Start by keeping track of expenses. For a few months.
A few months later, he sees patterns in his spending and realizes that his basic expenses are only Rs 60,000 per month. The remaining Rs 20,000 is just unnecessary expenses.
Here you can go little by little reducing your unnecessary expenses.
Suppose you can reduce it by Rs 15,000.
Your excess will now increase by this new amount of Rs 15,000 (since you have cut down on unnecessary spending). In other words, it goes from Rs 10,000 (before) to Rs 25,000 now.
It is a great improvement.
This is still less than the required Rs 35,000 (according to goal-based calculations). But still better than Rs 10,000 per month.
Well, frankly, you don’t need expense tracking. Because it may not result in more savings. You can always do this every 2 years to see if you have gone back to spending money unnecessarily or not.
But the most important thing going forward is to track your investments and see how well you continue to invest the amount required for your goals.
If you can save the required amount each month, your financial goals are on track and the remaining surplus can be used as you wish.
This is why tracking investments is useful.
You are much more aware of your goals and how your investments will help you achieve them. You know where you stand and it’s an important first step when you have a long journey ahead of you.
The main reason to track spending over time is to identify and eliminate unnecessary spending habits. But as we’ve discussed in this article, just tracking expenses isn’t enough. You should also keep track of your investments and goals.
