Top 5 Reasons Tracking Spending is Problematic

You need a budget!

No. No you don’t.

OK, fine. But then you need to track your spending. Every dollar!

Yeah, I’m not so sure about that, either.

 

If you’re a born spender and have never met a credit card you didn’t like, you would benefit from both a detailed budget and the tracking of every penny going out the door.

Personally, I’m more of a born saver. Or maybe I learned to save. Frankly, whether it’s nature or nurture is immaterial.

The fact is that I somehow became financially independent after about ten years in the post-residency workforce without budgeting or tracking my spending.

Tracking your spending a good way to learn about your habits, though, and I did it for the better part of three years once I started blogging, but the process is not without issues.

 

Top 5 Reasons Tracking Spending is Problematic

 

#1: Everyone Does It Differently

 

Spending is a hot topic in discussion forums, especially when it’s all doctors talking as it is in the Physicians on FIRE Facebook group or you’re dealing with big spenders like some of those in the fatFIRE group.

When someone asks what others spend the most on, the responses inevitably include things like:

  • “taxes”
  • “my kids’ college tuition”
  • “VTSAX”
  • “donations”
  • “the mortgage”

 

I guess I “spend” or have spent money on all of these things, but when I was tracking and reporting my spending, I didn’t include any of them. Let’s look at each one in more detail.

 

Taxes

 

Income tax is a byproduct of having earned income. If you’re employed, roughly 90% to 110% of it is withheld from your paycheck, so it never even hits your accounts in the first place. When you stop working, this tax could go away completely. I’ve never considered income tax paid to be money spent.

It helps to consider why we wish to track spending in order to decide whether or not to count a particular line item as spending or not. With the focus of this site on financial independence and retiring early, we’re generally tracking spending to determine how much money we need to be FI and to be in a position where work is indeed optional.

It makes sense to disregard income tax as money spent. For future planning purposes, consider only the amount of income tax you would anticipate owing as a retiree, which ought to be small if you don’t have huge tax-deferred retirement account balances or continued earned income.

Income tax isn’t the only tax we pay, though. There’s also property taxes and sales taxes and I actually count both of those in the spending column.

Property taxes (real estate taxes) are a byproduct of owning property. If you choose to own a large, valuable home or live in a state with high property taxes (or both), you’ll spend a lot on property taxes.

If you live in a small home or a state with low property taxes, you’ll spend less. If you’re a renter, you’ll spend nothing on property tax. The cost is a result of the choices you make, and paying property taxes is essentially a form of consumption.

I do count property taxes when determining my spending, and they’re not going to change in retirement unless your living situation also changes. If anything, they’ll just keep on rising.

What about property taxes on investment property? That’s tricky, because you do have to write the check, but the cost is hopefully offset by the income or appreciation from the property. I probably wouldn’t count it as spending, but it could be a gray area.

Sales taxes are baked into the price you pay for goods and some services, so these taxes are obviously included when calculating spending.

 

My Kids’ College Tuition

 

Some people do spend a heck of a lot of money on not only their kids’ college tuition, but also those $300 textbooks, random fees, room and board, beer, and more.

Some choose to cash flow it, paying as they go. Others save well in advance, shoveling tens or hundreds of thousands of dollars into 529 plans.

You might bear this cost for two years if you have one child in a trade school, or it could span decades if you have several kids a few years apart who take different paths. You know, a lot of people go to college for seven years, or so I’ve been told.

When I was diligently tracking my spending, I did not count our 529 contributions as a form of spending. It felt more like investing, but it’s really more like pre-paying for a future cost, which sounds an awful lot like spending.

I was probably wrong to disregard that as a non-spend, but, like I  said, everyone does it differently. At least I know it’s one cost that will go away eventually.

 

VTSAX

 

A reference to (almost) everyone’s favorite mutual fund, the Vanguard Total Stock Market Index, many people say their most expensive purchase every month is VTSAX or whatever investment they’re loading up on.

For reasons that should be obvious, I don’t think it makes sense to count money that you save and invest as money spent. Nevertheless, if that’s where most of the paycheck goes, I can see why some people say it’s the most expensive thing they buy.

 

Donations

 

Here’s another gray area and another place where I may have been doing it wrong.

A substantial majority of our charitable giving is done in an indirect manner. I donate the most highly-appreciated mutual funds from our taxable account to a donor advised fund. This is typically done in one big chunk towards the end of the year.

Throughout the year, we make grants from our donor advised fund. Last year, we gave away $10,000 to charities requested by readers and a similar amount to charities of our choosing.

Although I don’t count any of this is spending, the funding of the DAF does decrease our net worth. However, when I no longer have earned income, I don’t anticipate making substantial further contributions, but I will have a sizable pot of money to dish out over my remaining lifetime.

 

The Mortgage

 

I haven’t made a mortgage payment in years and we own our properties free and clear. However, for a long time I did have a mortgage (several, actually) and I would expect most readers have one, too.

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The principal portion of your mortgage payment does actually improve your net worth. Should only the interest portion be counted as spending?

If you do own your home outright, should you factor in imputed rent as a hidden spend? There is a hidden cost to parking that money in a home, as there are probably other investments that would be expected to offer a higher return over the long haul.

Home ownership is a messy mix of consumption and a high-fee investment. In terms of calculating your spending, well… it’s problematic.

 

#2: When Spending Isn’t Spending

 

Speaking of home ownership and messiness, try to keep the Legos confined to one room. Also, how do you categorize costs related to home improvement?

For example, you might remodel a bathroom for $12,000 and expect the renovation to increase the value of the home by $10,000 to $15,000.

Did you spend $12,000? Or only $2,000. If the value was truly increased by $15,000, can you give yourself a $3,000 spending credit? Was it antispending?

You might spend money to improve investment property. If the outlay increases the amount of rent you can charge or makes it more appealing to Airbnb guests, surely that’s not spending, right?

There are other situations where spending maybe isn’t spending.

It’s not just home improvement; what about personal improvement? You buy a book that helps you become a better entrepreneur. You enroll in a $500 course that will save you many thousands of dollars each year. You go on a restorative retreat that allows you to be more productive at work upon your return.

Each of these examples requires an expenditure, but the return on investment may offset the cost ten times over.

 

#3: Past Performance May Not Be Indicative of Future Results

 

As I mentioned earlier, the main reason for tracking spending is to get an idea of what your future spending might look like and allow you to determine how much you need to save (or how much passive income you need to generate) for retirement.

In the years that I tracked it, our spending was remarkably consistent. The first full calendar year, we spent $62,000. The next year, it was $61,000.

Three quarters of the way through the third year, we were on pace to spend about $66,000. Then I went out and dropped nearly $30,000 on a car.

So the final year, if I would have stuck with the tracking and tallied it up, the final number would have ended up being about $100,000 that year.

Throughout this time, our health insurance has been heavily subsidized by our employer.

There are a lot of “one time” expenses that come up more often than you realize. For the rare ones, like buying a vehicle or doing significant home repairs or improvements, an actual or virtual slush fund should probably be accounted for when determining your spending needs, if not your actual spending.

If you spend $20,000 to $30,000 on a new car every 3 to 5 years, you should count that as a $5,000 to $10,000 annual expense. I didn’t.

Additionally, your family size will not remain constant over a lifetime. If you’re a parent, your kids’ appetites will grow. They’ll learn to drive and will drive up your auto and umbrella insurance bills. They’ll leave home and maybe boomerang back and perhaps one day have kids of their own.

They may get into legal trouble or have expensive medical issues. They might be wildly successful financially or woefully helpless without your continued support. They’re basically one giant questionmark.

But hey, so are you.

Your wants and needs will change. The hedonic treadmill can suck you in despite your best intentions. New friends can mean new expenditures. You’re not going to make them go on that Danube River Cruise alone now, are you?

Tracking spending is useful to get an idea of what your spending looks like at one slice in time, but don’t expect the pie to be cut into equal slices as life unfolds.

 

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#4: The Gamification of Spending

 

If you have a competitive streak in you, once you start keeping score, you pay closer attention to how you’re playing the game. In terms of tracking your spending, this could be a very good thing or a not-so-good thing.

When I’ve closely tracked my caloric intake, as I’ve done for a month at a time a couple of times, I tend to snack less and eat smaller portions. I want to get a good score, and in that game, I’m going for a low score (yes, I know all calories are not the same, etc…).

The same can be true when tracking spending. You might try to beat your previous “high score,” which is actually a low score, and may be unnecessarily depriving yourself.

Granted, most people would benefit from this gamification. After all, people who take it upon themselves to track every dollar spent are usually doing so in an effort to identify where the money is going and how more money can be saved.

When taken too far, or if you’re already spending a relatively low amount, you might run the danger of acting cheap. I see nothing wrong with being frugal, but it’s not cool to be cheap. Yes, there is a difference.

 

#5: Tracking Spending is Kind of a Pain in the Butt

 

It used to be that the only good way to do this was by manually entering every purchase onto a paper ledger or computerized spreadsheet.

The good news is that it has gotten easier, and much of your tracking can be at least semi-automated. Websites like Mint and Personal Capital will automatically track any expenses you put on a credit card or pay from a checking account as long as the accounts are properly linked with the free online service.

 

 

Those services aren’t perfect, though.

They do their best to categorize every purchase, but too often they’re just plain wrong.

Sometimes, something like an investment, a credit card payment, or money transfer between accounts will be counted as money spent. You can manually change these miscategorized transactions, but to catch them, you need to review the ledger line by line.

If you want your spending totals by category to be accurate, you’ll have to split some individual purchases into multiple categories. If you swung by Walmart and picked up some beef jerky, a bottle of whiskey, a fishing pole, and some duct tape, I’d be very curious as to what exactly you’ve got planned for the evening.

I’d also say you’ve got four items that fall into four different spending categories. If you want the numbers to be accurate, you’ll have to manually enter the prices of each object, one of which may not have sales tax applied (the jerky) and another that may be taxed at a higher rate than the others (the whiskey). Or you could cheat like me and call it all “groceries,” not that I ever left the store after picking up exactly that shopping list. I prefer beer to whiskey.

Cash purchases also require manual entry. We’re still a ways away from being a cashless society, so every time you pull out a greenback, you’ve got to make a mental note to enter that transaction or pull out your phone and enter it in the app right then and there.

 

Should You Track Your Spending?

 

If you’ve never done it before, it honestly is an insightful exercise. I learned that this post-retirement life will probably cost me about $220 a day, and that’s a very useful number to know, even while knowing it’s certainly subject to change.

It’s true that different people will calculate spending in different ways, and there will be some gray areas. If you’re consistent in the way you track itand make some reasonable judgment calls, you’ll end up with some useful data yourself.

It can be a pain in the butt, and that’s one reason we stopped tracking it as closely as we once did. We also learned that our spending didn’t vary much from year to year, although we recognize that it will change, perhaps drastically, as we enter into different phases of our lives.

Is it problematic? It is, but I do recommend at least having a rough idea of how much you’re currently spending and what kind of lifestyle you’ll want to support in retirement.

It’s less useful as a comparison with other people’s numbers because we all live different lives and may count or leave out different things.

I no longer keep track like I once did, but I have a good idea of what our spending needs are going to look like, and that’s good enough.

 


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Do you track your spending? To what level of detail? What have you learned from keeping track of your expenditures?

 

28 comments

  • FrugalMD

    Categorizing expenses in either system isn’t as difficult as you suggest. The automatic categories at least with Mint are good enough most of the time and they learn based upon what you’ve changed over time. I quickly scroll through the list on my phone every few months and it only takes a few minutes. Other times I notice high values where they don’t belong on the trends and you can click that category to go right to the transactions that make it up. Easy!

    Large purchases are definitely a conundrum when you’re trying to track spending though. Spending a lump sum on a car is spending, but you also add the car as an asset so the net is zero. Trouble is, when you run the trends, there are these huge outliers that mess everything up.

    The real “spending” on a car isn’t the purchase price, it’s the depreciation. As you update the asset value it gets reflected in net worth, but there’s no good way to capture depreciation as “spending.”

    I suppose a way around the former is simply to give it the “transfer” tag (at least for Mint). You transferred the money from checking to the asset after all. Then it doesn’t appear as spending. Where does that stop though? Is the new dinner table a transfer too? Do you add it as an asset? Sad to say on Craigslist it’ll only fetch maybe half of what you just paid if you’re lucky. Then there’s Walmart where you can buy everything from alcohol to a TV to new tires. Personally I would separate out big expenses, but food vs. a laundry basket? Ain’t nobody got time for that…I just tag the purchase “shopping.” Yeah, I’ll never know how much I’m spending on groceries specifically but that’s ok.

    I think in the end you just have to make your own rules when it comes to how you categorize spending and just have to keep those rules in mind when you evaluate the data. Doesn’t mean the data isn’t useful, you just have to figure out what data you need up front, how much effort you’re willing to spend, then categorize accordingly.

    • Good points all around. I think as long as you’re consistent in the way you track it, you will get useful information.

      I got tired of logging into Mint at least weekly. If I didn’t, I’d forget what some transactions even were. What did we get at Costco? Walmart? Target? And when there’s two people shopping, you both have to be somewhat committed. It’s not that difficult, but it does take some effort. I already have far more online chores than the average person (‘cuz of this blog).

      Cheers!
      -PoF

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  • Lordosis

    This is one of those things where you can get 80% of the way there with minimal effort but that last 20% is a pain in the butt.

    • The Pareto Principle definitely applies here.

      I figured I was probably FI with spending of about $70,000 a year before I tracked it at all. The monthly credit card bills were usually $4,000 to $6,000 and I spent a similar amount annually from the checkbook for property taxes and piano lessons. Took one minute of mental math one time to guesstimate that.

      It turned out to be pretty much spot on.

      Cheers!
      -PoF

  • Confused

    Not to nitpick here, but you have an ad for The Motley Fool on your website. Is that website really something you want to push in your readers?

    • They have some clickbait stuff along with some really good articles. I hope my readers are savvy enough to recognize which is which. That’s my goal to get them there, anyway.

      There are a number of individual ads that I have little control over and if you hit refresh, you’ll probably see something entirely different.

      I do appreciate the feedback.

      Cheers!
      -PoF

  • saildawg

    I think tracking is a good idea for anyone to start with. You don’t know what you don’t know. Once you have done it for a year or so you have a pretty good idea of your spending patterns etc. Then it becomes less important. I have tracked spending for 5 years. It started first as a budget, then once the behavior was reinforced I did not feel the need to budget as I spent money more intentionally. I started to focus on my savings rate which I used big ERN equation #3, basically (all savings)/(all savings + expenses)
    For the house I consider mortgage principal as savings and interest/escrow as expense.
    I did the for 2 years, and found that it was pretty consistent. If you reinforce the behavior of being intentional with your money then you don’t really need to track. The problem is, it likely will take tracking to develop this behavior, so my advice is to track spending for a year or two.

  • Tracking spending once a month and discussing it with my wife made me realize how wealthy and fortunate we are. Our spending is out of control. And it is out of control on food (healthy delicious salmon a couple nights a week), fitness (personal trainer and Pilates), and doctors (just had first baby and self improvement).

    Those categories, plus our home, are massive for us. And we are damn lucky we can spend a fortune each month in those categories.

    So it can be an exercise in being grateful and instead of self flagellation.

    • We are fortunate to be in this position, aren’t we?

      I’m glad I did track it for a while. It was educational, even if it didn’t lead to any changes. If anything, I’ve realized I don’t need to be as frugal as I sometimes tend to be. It’s a hard habit to break, and I’m perfectly happy with the status quo.

      Cheers!
      -PoF

  • Tracking spending in my universe is NOT tracking categories, which is a total waste of time. If you need tires buy the damn tires, you don’t agonize over the tire purchase 3 months later and whether you could have gotten another 5K out of them babies.

    I use tracking for one reason to determine realistic baselines for how much money I’m going to need and some estimate of excess. I also use it to understand the pain associated with FORCED frugality, the frugality you get to when you have to start robbing Peter to pay Paul to not run up the credit card. Knowing your lower limit is essential IMHO and completely testable over 6 months or so. Understanding this is very useful in recession when trying to combat SORR for example. A lot of people talk a good game “I’ll just cut the travel budget…” but it’s a whole nother thing to live that game and see how it feels, more importantly see how wife and family feels

    I also know my upper limit, the limit where my draining of too much dough from the portfolio becomes an issue. My upper is self imposed at 10k/mo, my lower is 6500/mo, and I live in the middle neither extravagant nor pauperish and the wife is happy. I consider living under the upper limit a form of saving as over time a little wad of cash is generated for the unexpected issue. 6 months under 10K may equal a short trip to EU or a new AC. Tracking also reveals costly months and cheap months and the repetition of costly and cheap is cyclic and predictable. may put off buying those tires to Oct, a cheap month instead of Aug when taxes and insurance are due.

    I don’t play mind games with “a new bath costs 12K but increases the value 15K unrealized gain”. That’s just a ploy to over spend and convince yourself its really OK to do stupid stuff. If you need a new bathroom buy a new bathroom and pay for the damn thing, or save up until you can afford a new bathroom.

    I use Mint to generate the CSV file and I do all my spending from 2 accounts a FIDO cash back card and a checking account. Debits are spending and credits are “antispending” and the autosum in my spread sheet on a month’s data tells me how much I spent for the month. I track taxes in a separate line item on the same sheet so I have a ready month to month of my tax payments and judge if my tax payments are adequate but not excessive. Yearly spending is merely the 12 month total of monthly spending and I have spread sheet templates dating out 10 years so when filled I will have a decade of spending recorded. This method takes literally 5 minutes a month to download the CSV and generate an accurate picture.

    Great article!

    • Making it quick and easy enough is the key to keep it going. I wanted lots of detail for purposes of the blog, but it was far more info than we needed for our own purposes.

      I agree that the categories don’t matter much once you know what a normal month or year looks like.

      Cheers!
      -PoF

  • We did track expenses closely while we were students and during my residency. At that point we had limited or no income. So, minimizing our spending and making sure we wouldn’t run out of money was the main thing that we could do to build our financial foundation at that point.

    Once entering practice, building revenue became the paydirt for effort and we only ballparked spending. It was freeing. Now, the main focus is investing without blowing it and deciding how much to work/spend now vs the future.

    I think we all have limited bandwidth for dealing with our finances without it hindering our lives. So, we focused on different aspects at different times.
    -LD

  • A budget is most useful for someone with a problem, so you can find and fix the problem. If you want to get out of debt, you must budget to find how much extra you can pay on your debts. If you don’t, you will pay money on debt that you needed elsewhere and end up borrowing it back. It is one of the first things I do when I help someone with their finances. You must know where your money is going now so you can redirect it to where you want it to go.

    Dr. Cory S. Fawcett
    Prescription for Financial Success

  • Josh

    Great post. When I was a resident we had little to no money and tracked/budgeted like crazy. We don’t go to that detail now. What I try to do is try to get the best value for every spending category. We need internet so I try to spend the least on that while getting the best service. It’s a necessary expense. Same for cell phone, car insurance and all other recurring expenses. Annually I will take a few minutes to research prices on home/car insurance, cell phone, internet, etc to see if I can get a better deal by switching services. Nothing crazy, but a few hours per year total is not that much. I keep my “slush fund” at $10k for unexpected expenses (mostly home repairs or medical bills) and top it up when I use. I imagine many do the same.

    • I didn’t budget or track spending as a student or resident, but I’ve always been pretty good about saving money wherever possible while trying to get good value and splurging on certain things that are most important or fun.

      Using discount cell phone services over the years from PagePlus to Republic and now Google Fi, I’ve saved thousands over just going with Verizon or AT&T.

      Cheers!
      -PoF

  • Lynne

    I agree with the others that strictly tracking expenses is mostly useful only in times of very limited income or when you are spending too much and wondering where the heck the money went. When one is a frugal person by habit then overspending usually isn’t an issue.

    When I was trying to determine what I needed to live on in retirement then I looked at past spending plus the recurring bills to get a baseline, and took steps to lower some recurring expenses where possible (satellite dish had to go, a horse that couldn’t be ridden had to go, landline phone cut off). Getting rid of a few expenses like this freed up a good $300-350 a month that I was wasting. This means that now when I go out to eat with friends once a month I don’t feel guilty blowing $25-50 on dinner and drinks because I’m already money ahead.

    I also took the historical spending and bumped up by 10 or 20 percent to give myself wiggle room for impulse purchases or price increases. And like most I do keep a slush fund for the inevitable car and house repairs.

  • Caro

    There are two problems trying to be solved here. One is figuring out where you’re overspending, and for this, I’d argue there’s no replacement for a little notebook (or electronic equivalent) to record each and every thing you buy by the end of the day. Well, that or a daily cash allowance, so that when it’s gone, it’s gone.

    The other problem is figuring out how much money you need to cover your spending. For this an aggregate spend – including – ESPECIALLY including – irregular expenses. The irregulars are what surprises most people who have a problem.

    For me, the epiphany came when I read about the 60% budget, which says you can make all the detailed budgets you want but in the end it doesn’t matter what you spend the 60% of your income on, as long as you don’t spend more than 60% of your income (the other 40% gets allocated to other things according to your goals, whether it’s retirement savings, 10% short term savings i.e. vacation fund, emergencies, etc.). Your percents may vary.

    I track it by keeping an eye on my credit card tally each day during the month to make sure it’s under target. Tracking the current charges is more than sufficient for my needs. Then once a year or so I look a little more closely to identify things that aren’t that valuable to me to cut out or reduce my spending on. I generally do this by pulling the distinct categories off my credit card statement for the year, then throwing everything else under generic because it really doesn’t matter.

  • I love tracking our expense. I do it the old fashion way – manual entry on a spreadsheet.
    It’s great to see how we did at the end of the month. We have an overall budget, $4,000. If we spent above that, we’ll dial back next month. If not, we’re fine. Lumpy expense is not a big deal to me. I don’t worry about them much.
    Cash spending isn’t a big problem for me either. I put it under the “cash” category and track the ATM withdrawal.

    I’ve been doing this for almost 10 years now. I love it, but most people probably wouldn’t.

  • I view budgeting and tracking spending like I view taking cholesterol meds – if you need them, take them. Otherwise keep on keepin’ on (Joe Dirt!). I used to track my spending when things were much tighter and it was great to see where my money was going. But, I honestly believe the lessons I learned about myself then guide me now that we’re making much more money. I also believe though, that the most important thing is simply to prioritize WHAT you’re spending on. After that it doesn’t matter. We give first, invest very aggressively second, and spend whatever we want to and then save the rest. We’re at FI but not RE.

  • Ruth Tobin

    Thanks. You may be over-thinking all of this. I’ve been tracking my income vs. expenses for around 15 years. I include all of my earned and unearned income, and then subtract everything I spend money on–including taxes (however I don’t include investments since that’s not really spending. It’s more like moving money from one place to another). At the end of the year I see the bottom line. It answers the question of whether I spent more than I made. Of course, there are other considerations such as home appreciation/sales, but they only matter if/when you sell your property.

  • Tami Qualls

    Ouch! I’ve never calculated how much my post-retirement life will cost me. If it is like yours, about $220 a day, I’m in big trouble.

  • Interesting article. My husband and I track spending very closely. He definitely finds it useful, however, I never particularly understood the value because we are so predictable. Lol. But, thanks! Good food for thought. Melissa Damiani

  • Woah! I typically don’t track my spending, because I don’t like to feel like I’m overspending, but I do make sure to only make purchases that make sense. I will admit that I could be a little more intentional with how I spend, but for the most part, I’ve been pretty good when it comes to my finances, so I am just working on realizing when I’m compulsive shopping.

  • This was a very interesting post! I think we can get so caught up sometimes in the details of every expense. Definitely think after tracking for a bit and recognizing spending and expense patterns, it helps to relax with tracking as well!

    Kileen
    cute & little

  • This is such an interesting way to look at it! We try to stick to a “loose” budget in our household, but reign it in tighter when necessary!!

  • I honestly don’t track my spending for now, but that might change in the future because I need to do better @ getting organized.

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