Many people have this habit of tracking their expenses. Though not an uncommon habit, it has changed avatars in recent years. Earlier, people used to note down expenses on paper. But now, there are hundreds of free apps that do that for you automatically. Just check your phone’s app store for ‘expense trackers’ and you will see tons of such apps.
Keeping tabs in outflows
If you are in the phase of life where you constantly run out of money at the end of the month, then you really need to track expenses for some time. After a few months of exercise, you will have a better idea about where your money is going. It might be going towards non-negotiable basic expenses, some discretionary ones and a few outright unnecessary expenses.
This awareness of expenses bucketing in itself is a major victory for many. You can now work towards cutting down on unnecessary expenses so that you are left with some surplus at the end of the month.
But is just continuously tracking your expenses enough?
Will it help you reach your money goals?
The answer is NO for both the questions.
To reach your goals, you need to save and invest. Isn’t it?
And that is where tracking investments (and goals) comes in.
You need to first figure out what are your goals and how much you need to invest for your goals.
And if then you find that your expenses are a lot higher than what they should be to leave enough surplus on the table, then you need to do a few months of expense tracking to figure out where you can reduce the expenses. Easier said than done but still, an exercise worth giving a shot.
How will all this pan out?
Like always, let me use a very simple example to explain it.
Suppose your monthly income is Rs 90,000.
Goal-based investing
You have two goals (let’s say) of child’s higher education that need Rs 15,000 per month of investment and retirement that needs Rs 20,000 per month of investment. So in total, you need to invest Rs 35,000 per month for all the goals.
Now from your experience, you know that at the end of the month, you are barely left with Rs 10,000 only. That is, your monthly expenses are about Rs 80,000.
So what to do now? You start tracking expenses. For a few months.
A few months down the line, you start seeing patterns in your spending and realize that your core expenses are just Rs 60,000 per month. The remaining Rs 20,000 are just wasteful spending.
Now this is where you can gradually begin to cut down your wasteful expenses.
Suppose you are able to reduce it by Rs 15,000.
Now, your surplus increases by this newfound amount of Rs 15,000 (since you cut down on wasteful expenses). That is, it increases from Rs 10,000 (earlier) to Rs 25,000 now.
This is a big improvement.
It is still less than Rs 35,000 required (as per goal-based calculations). But still better than Rs 10,000 per month.
Now frankly, you don’t need expense tracking. Because it might not lead to any further savings. You can still do it once every 2 years to see if you have once again started spending money unnecessarily or not.
But more important going forward is to track your investments and see how closely you can continue to invest the required amount for the goals
If you can save the required amount every month, then that means that your financial goals are well on track and whatever surplus is leftover, is free for you to use as you want.
This is why tracking investments is useful.
You are much more aware of your goals and how your investments are helping you progress towards your goals. You know where you stand and that is an important first step when you have a long journey ahead.
The main reason why one should track expenses for some time is to identify and eliminate wasteful spending habits. But as we discussed in this article, it is not enough to just track expenses. You also need to track your investments and goals.
