Expense Tracking: Why Does it Matter?
Oftentimes when we discuss financial plans with prospective clients they are unsure of what their monthly cash outflows are. They have an idea of how much goes to the mortgage or other various debts which are fixed and occur every month. However, the discretionary spending which occurs on a monthly, and even daily, basis is just a vague estimate and neither us nor the clients know the true dollar amount that they are spending. So why do we encourage expense tracking so relentlessly?
Creating Habits Lead to Improved Results
For starters, expense tracking can be useful as a habit. The best part is it only takes 30 minutes per month! Once expense tracking becomes part of your monthly routine then you will begin to pay closer attention to what you are spending your money on. This can help to prevent you from recklessly spending money on things that you do not actually want or need. Seeing the end of month spending number remain constant, or even decrease will feel good and create an emotional drive to want to continue to spend your hard earned money wisely. Additionally, having both spouses on the same page in regards to finances is an invaluable relationship to have. One spouse can take the lead on tracking expenses, but reviewing the results together will do wonders for long-term success.
Expense tracking is also a good habit because spending less results in you being able to save more. When you track expenses at the end of the month and see that you have a positive cash flow you will be able to see the results in your bank account. Seeing the account balance increase and your net worth increase will just create another emotional drive for you to continue tracking expenses and to continue getting the dopamine release from seeing an improved financial position.
Importance in Financial Planning
There are three variables under your control when it comes to financial planning: How much you make, how much you spend, and how long you work. The first one is slightly harder to control because while you want to make as much as possible, you must also find something that you enjoy as well as having time for yourself. Because of this, working multiple jobs and/or a job you dislike are probably not something you would like to do. The third variable, how long you work, is easier to control but it is also one that is hard to change for emotional reasons. Some people want to retire as early as possible, and to do this some sacrifices need to be made. Most of the time that sacrifice is that they need to spend less money. If they cannot follow through with spending less then they will need to work longer.
Spending is the easiest variable to control because you have control over every dollar spent. Because of this, it is a variable that we spend a lot of time discussing with all clients because a fluctuation of even $1,000 per month can drastically change the plan. The 4% rule states that in order to have a 30 year retirement with a high probability of success, you can only withdraw 4% or less of your retirement portfolio per year. If you spend $1,000 more per month than our assumptions then that is an extra $12,000 per year. Using the 4% rule, in order to have properly saved for retirement and provide for this extra $1,000 per month you will need to save an additional $300,000! This brings us back to the other two variables. To save the extra $300,000 that you need for retirement you will either need to make more money or work longer to save that money.
Spending needs are a core piece of all financial planning. Being off by even a seemingly small amount per month can lead to drastic changes in your plan, and could require you to either work longer or find a way to make more money. That is why expense tracking is so important. Having a solid grasp of exactly what the need is will improve your likelihood of success on your financial journey. We even offer a free template that you are able to customize to fit how you spend your money at peakwm.com/expenses. If you would like to further discuss your financial future you can contact the Peak team at (734) 681-7575 or email me directly at preston@peakwm.com.