Expense Tracking | Wealth Management

There are two components of net profit cash flow: income and expense. Increasing income is half the equation and reducing expenses is the other. Income expansion is where most people concentrate their efforts but let’s look at expense reduction as an equally important part of the equation and how to start expense tracking.

Most people have a good idea of what their income is, especially if from wages or salary. From gross income you can see the deductions for taxes, IRA contributions, and maybe some other deductions itemized by the employer. Many people have the net remainder deposited to a bank account from which many automated payments are made such as for mortgage, insurance, and utilities. All these amounts are fairly predictable. What is left over is then often lost in discretionary spending.

If you are self-employed, income is received in odd amounts and at various times as clients pay your invoices. From your gross income your own business expenses are paid, sales taxes and estimated taxes accrue and are periodically paid. Anything left over is your profit and paid to yourself or accumulated for business reinvestment.

If you are already a business owner you probably have a fairly good idea of your typical revenue from sales and a good sense of where your expenses are. You might already be using expense tracking software or have a bookkeeping service do it for you.

Many wage earners have little idea of what expenses their net income goes to. Perhaps a glance at the check register, if it is up to date, a look at the balance due on the credit card or bank statements, or a call to the bank, or an ATM balance request, is all they do to see if they are in the black or getting low on funds. Each pay period is an unconscious game of guesswork, juggling bills, and often accumulating debt when credit card charges can’t be met.

The first step to increasing your net worth is knowing where the expenses are going. Very few people keep any track of their daily expenses and consequently have no idea where their money ‘disappears’.

You can add more sources of income but it won’t be much help if the expenses rise to match them. On the other hand, reducing unnecessary expenses can improve your financial position significantly, relieve the pressure to work longer and earn more, and be able to see the benefit to your bottom line.

The following steps must become habitual. It takes very little time and effort.

1. Plan your purchases. The further ahead you plan the cheaper things are.
2. Expect a discount. Look for wholesale pricing, or ask for a discount.
3. Get a receipt. Look at it and confirm the items and the total are correct.
4. Record all your purchases. No matter how small, write it down or use software.

Here’s how to track all your spending. Use the following major categories to allocate where your expenses go.

1. Self. Pay yourself first. 10% minimum of what you earn is yours to save.
2. Giving. 5 – 10 % of your income for charity or tithe.
3. Taxes.
4. Debt. Mortgage and loans.
5. Household. Food, clothing, utilities, repairs and maintenance, or rent if applicable.
6. Transport. Commuting, car payments, gas, repairs.
7. Insurance. Health, homeowner, liability, contents, life.
8. Business.
9. Recreation. Eating out, entertainment, sports and hobbies.

These categories should cover all the transactions that you make daily and monthly or yearly. Even after one month of tracking every exchange of money you do can be an eye-opener of where your income goes.

Expense tracking does not require complicated expense software. A simple notebook, or free online expense tracking website, an expense spreadsheet, or income and expense tracking software like Quicken are all suitable methods.

Accounting for every penny does not make you a miser or wealthy in itself but it does tell you the value of what you work hard for. If you make it a habit to consciously choose where you spend everything you can soon learn to find real bargains, avoid waste, save more of your income, and reallocate it to investments and longer term goals.

The next time you go to automatically buy a boutique beverage, or some spontaneous purchase, think twice and ask yourself if it is helping you to get where you want to be. Deliberately planning and making purchases can result in significant savings and shows what the real value of money can do for your well-being and future wealth.

Being aware of what money can buy and accounting for all your expenses allows you to save and put more of your income aside that will quickly fund your net worth.

Increasing your income sources and getting your spending under control with expense tracking can be one of the the most valuable and rewarding habits you can have. Every penny saved adds to dollars earned. Every dollar saved into hard assets adds to your security and standard of living in the future.

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