I realize that only some small subset of the folks who end up on this website are likely to pursue financial independence. It’s not for everyone. But if we can make a single small impression on you, dear reader, it would be to invest time in tracking your spending. It doesn’t matter if you are clawing your way out of debt or nearing retirement in your late 20s, you must know exactly how much money is being spent. The more specific you can be in tracking your spending, the more power you have in making change.
But Mr. CC, this is work. Ugh! Why bother?
As pointed out in this essential post, if you are not saving and investing at least 15% of your income, forget ever retiring at the standard retirement age. Go ahead, read it — it’s hands-down the most important blog post of my life.
Those figures assume you are starting from a net worth of zero. If you are carrying debt my friend, tack on the additional years it will take to pay down that monkey on your back.
Conversely, if you can start to increase your savings rate — ideally up to 50% — your working life becomes optional in less than two decades! This has nothing to do with your income and everything to do with savings rate.
The idea here is to take a very hard look in the mirror. If you are in debt, buying morning lattes, and happy the checking account is barely positive, you are still in the red. Without a pension or a parent’s good fortune to limp you along, you will be a slave to a job for the rest of your life. The psychological burden of carrying debt can also be crippling, so you can’t afford not to change some habits!
The first step towards saving is quantifying your spending.
Tracking Your Spending
The ingress and egress of money in life is for many a complete mystery. We may understand in a general sense our salary. But if I put an innocent finger gun to your head, could you tell me your expected take-home pay in any given year? Before the money hits your bank account from your employer, how much is being diverted to taxes, healthcare, retirement plans, etc?
And most importantly, once the post-tax money arrives in your bank account, how much of it is leaving and where is it going? Let’s dive in on this crucial element of securing your finances.
The Tracker
This need not be complicated. Honestly, we’ve been tracking our spending in a series of Excel spreadsheets for over a decade. Fan favorites of the financial independence community are Personal Capital and Mint, which connect all your financial institutions in a single site. These platforms seamlessly allow for visualization of spending and net worth tracking. But as mentioned before, Mrs. CC has an unwavering distrust of stored passwords on the internet. Therefore we continue to hold down the proverbial fort in Excel.
If you’re content on starting your own internal spreadsheet, I’ll outline our process below:
1. Define Spending Categories
Specificity, specificity, specificity. The more spending categories you have, the better you understand where your money is going. It’s a good start to at least know your yearly total:
“I spent $54,389 in 2018.”
But if you only know the total, can you effectively identify any glaring weaknesses in your spending habits? In contrast, how about this?
“I spent $10,000 dining out in 2018.”
“In 2018 I spent $4,000 on hot yoga.”
“I spent $1,456 on my morning coffee this year”
Now that might (or might not) raise some eyebrows! (Editor note: These are clearly not CC spends. Mr. CC’s rigid joints of brick and steel have no place in a sacred house of hot yoga. Plus — pro tip — yoga is on YouTube for free 😉 )
Begin with the obvious and big expenses: Housing, transportation, and food. It might be worth revisiting the Five “Essentials” that are Destroying Your Savings.
Housing
You very likely are paying rent or a mortgage. If you own a home, you have escrow payments to cover property taxes and insurance. As homeowners, we like to break out “mortgage” and “escrow”. Seeing these categories separately allows us to plan for post-mortgage spending. Also, separating the expenses provides the added benefit of helping us keep an eye on those pesky insurance companies. Funny how those prices get to creeping up from time to time!
Transportation
For transportation, we include all car expenses (maintenance, registration fees, etc.) and fuel. We also include bus passes, commuter bike costs, and other less-common means of transportation here (e.g., Uber). If you are carrying a car payment, we would recommend tracking that separately. Again, those insurance companies occasionally giveth, but they most certainly shall taketh away! If you are not tracking your insurance payments, I can 100% guarantee you that you are over-paying. That’s a CC money-back guarantee!
Food
Ah yes, the subject of food spending is a fan favorite over here at CC Enterprises. We love food, but we see so much frivolity in how money is spent on food. A sandwich for $8 sounds like a reasonable deal right? My God, no! You can make a rock-solid sandwich at home for pennies on the dollar.
Anyway, tracking spending here is almost guaranteed to make your eyes bulge like that dead rabbit in my dog’s mouth (true story, for another time). Seriously, whatever you think you are spending in food, triple it. Go ahead, have at it. Prove me wrong.
And what grinds my gears even more is the fact that people pay 5-10x inflated prices to eat out, and then throw half of it in the garbage. Sir, where is your mother!? Clean your plate!
Back to helpful instruction: Break out food spending into groceries and dining out. If you buy a cake pop at Starbucks, that’s dining out. Sorry. If you buy a $2 package of nuts from the gas station, that’s grocery spending. Count it, my friend.
Speaking of Starbucks, if you are a big coffee drinker (as I am), you need a new row for coffee. And hopefully you’re already making most of it at home, right?
Other Categories
Housing, transportation, and food are only three of many categories you’ll need to consider. That being said, they are likely to eat up (get it?) a hefty chunk of your spending, so track them well.
Other categories include anything where money is spent in your lives with some regularity. It’s your life, so go nuts. Below is a complete list of our current spending categories. Try and be consistent so you can track the trends year-over-year.
Be Mindful of the “Miscellaneous”
Don’t make the mistake I did years ago and dump half of your spending under “Miscellaneous.” You’ll have a giant “unknown” category each month, which might be hiding some skeletons of your flawed spending habits. Again, break it down with a fine comb and try and decide if some of this deserves a category.
2. Spend and Record
This part should come easy. Spend money. At first it’s not necessary to make an effort to save, although that’s never a bad idea. The goal here is to establish a monthly baseline. Trust me, seeing the final numbers will inspire change.
Recording
Recording our spending is easy because we put nearly every dime on rewards credit cards. Rewards credit cards build us points for free travel, but also act as a nice database for easy spending tracking. If you insist on cash or debit, you may need to start requesting and cataloging receipts.
Sit down with your spreadsheet as often as necessary to track every dollar you spend. We do this twice a month, but the frequency doesn’t matter. Just make sure you are cataloging everything. Yes it’s work, but new results require effort.
3. Track Income
When you are paid, some portion of your base salary is being deducted to cover a variety of buckets, depending on your job. Of course we all pay taxes, and then depending on your situation, you might be contributing to other pre-tax buckets including a 401k, HSA, employer healthcare fund, etc.
You should keep a running tally of not only your post-tax take-home pay, but also contributions to pre-tax buckets including the 401k, HSA, or equivalent. Include separately any company match. These contributions will be rolled up in to your net worth and savings calculation, so it’s important to note. Also, you want to track these to ensure you are contributing the maximum amount each year, if you are choosing to do so. More on these accounts are found here.
4. Tally Your Monthly Savings Rate
This is fairly simple. Once you have tracked your spending and income for a month, let’s see how you did! A simple summation of your spending is straightforward, so do that please. Also, sum up your take-home pay, pre-tax savings (401k, etc.), and any company matches to get your total income.
Total Savings = Income – Spending.
Income = Post-tax paycheck + pre-tax contributions + company match + other income
How did you do? I pray you made more than you spent. The final step is to calculate your savings rate, which is a simple percentage calculation.
Total Savings Rate = (1 – (Spending/Income))*100
You should now have an idea of your monthly savings rate. Don’t punch yourself in the kidney if it’s low, or even negative. You’re in good company. The biggest change in our spending habits over the years has been brought on by simple awareness. We fickle birds do so many things out of habit. Once you see the totals on some of your spending categories, the motivation is generally self-perpetuating. This is why we pound the table on tracking your spending.
Now that you have an idea of where you are spending money and your overall savings rate, you are in a position of strength to make lasting changes. For us, it was very clear that dining out was crushing our savings. At our peak in 2015, we spent in excess of $5,000 in restaurants. It didn’t feel that expensive, but the numbers don’t lie.
A Note on Budgets
We don’t care so much about budgets. Folks live and die by budgets, and budgets certainly have their place. We do create a rough outline of what we think we’ll spend in a year as a guide, but we generally do not have strict spending ceilings. Some categories come in high and some come in low. But in tracking our spending, we’re dialed in tight like my piriformis on what we expect to spend each year.
If you struggle with impulsive spending, a budget might be required. Spend a month establishing a baseline, and then start putting some goals on paper.
Summary
I hope we can now agree on the importance of the savings rate, regardless of whether you wish to pursue financial independence/early retirement, or just get back out of debt. If you don’t want to work some C- job for the rest of your life (or worse yet, rely on someone else to do the saving for you), you can’t afford to drag your feet on your personal finances any longer. Take a stab at this simple task. In time, seeing money start to pile up will become intoxicating. You’ll be far more excited about that than a Chipotle burrito or another expensive clothing item still hanging with the tag in your closet. I wouldn’t be typing these words if I didn’t feel so strongly about this.
The next step is to examine your net worth. If you think your savings rate is exciting, wait until you start to see your net worth grow baby! See you next week guys.