At the end of August, a very patient Stephanie sent me an interesting question. When I didn’t answer her e-mail, she sent it again in January. I replied, promising to post her question while I was in Africa — but I didn’t get to it. Now it’s April. I think it’s time to set things right. Here’s what Stephanie has to say:
For a year now, I’ve tracked every single penny that comes and goes from my bank account. I now have over 365 days of detailed financial data about my earnings, spending, etc. Now that I have all of this information, what do I do with it? What are some methods for evaluating, adjusting, and creating a solid budget based on your history?
For a long time, I tracked every penny I spent. Then I stopped for about a year. Now, in 2011, I’m back to tracking my expenses. Why? Because knowing where my money is going helps me make course corrections and plan for the future.
I’m sure everyone does different things with the numbers they track. Because I’ve been using Quicken for a decade, most of my number-crunching is based on the reports that program provides.
For instance, I like to take several years of data and look at quarterly summaries of my spending by category. This helps me spot trends quickly. It might, for instance, help me see that I spent $250 on gas for the Mini in winter 2010, but only $150 in winter 2011. When I see changes like this, I can dig deeper to see if there’s a reason. (Aha! I was in Africa for three weeks in February 2011. And in winter 2010, I made two longish trips.)
I’ve also learned to be sure that my spending fits within the Balanced Money Formula. I don’t keep a detailed budget, but I do like to use a broad budget framework. With the Balanced Money Formula, I want less than 50% of my after-tax income to be spent on needs, such as housing and groceries and transportation. I also want more than 20% of my income to go to savings. There should be about 30% left over, and I can use that as I please.
Once I have enough data, there’s a game I like to play. In my mind, I call it “how low can you go?” The concept is simple: I’ll choose a category — “dining out”, for instance — and then spend several months or a year trying to reduce how much I spend there.
These are just a few of the ways I use the data I collect after tracking my spending. I also use the numbers to calculate how much I want to save for retirement every year, to figure out how much I can afford to put into my travel account, and so on. In a way, having all of these numbers is like playing with a bunch of building blocks. Using the information, I can try to re-arrange my spending in new ways, ways that better help me meet my goals.
Enough about my methods! Let’s hear about yours. If you track your spending, what do you do with the information you collect? Do you act on it at all? Or is it just waiting for the day that you need it? If you do act on the info, what sorts of things do you do? Do you use the numbers to help you create a budget? Direct your saving? Make adjustments to your spending? How can Stephanie use her records to help her build a better financial future?