Tracking your expenses is the single most important first step on the journey to FIRE, I believe. What gets measured gets done – I don’t know who first articulated this saying – but the idea is you can manage something if you can measure it.
We can research high interest savings accounts or how to invest or which stock to invest in; but until we know where our money currently goes each month, we simply cannot make decisions on where we would like our money to be invested in, moving forward. Or decide where we can save or where we can reduce our spending.
Related: Savings rate
Tracking your expenses helps you to answer this question – How much money will I need at retirement?
Everyone, whether they are on the FI journey to retiring early or pursuing traditional retirement always asks this question first. But without knowing how much you spend on living expenses now, you simply cannot answer this question.
There are websites such as the Australian Securities & Investments Commission’s Money Smart, which suggest that annually, a single person needs $27,368 for a modest lifestyle or $42,764 for a comfortable lifestyle; while a couple requires $39,353 for a modest lifestyle or $60,264 for a comfortable lifestyle.
But do you need more or less than what is suggested? Do you currently spend more or less than those figures? Without tracking your expenses, you don’t know which is your biggest category of expenses. And whether or not you are willing to cut or reduce this expense or even if you could do so. For example, your biggest expense may be your mortgage payment; in which case, you may decide to increase this payment so your house is paid off before you retire.
There may be expenses that you currently pay for your professional career which you will eliminate once you retire, such as any professional association fees, licence renewal fees or professional indemnity fees. You may also not want to eliminate these fees initially, just in case you need to return to work later for whatever reason, even in a part time or casual basis.
Conversely, you may pick up hobbies or interests that you have been delaying until you retire. You now have TIME to pursue these activities. You may decide to travel more, take up photography, start painting, learn a new language … the possibilities are endless.
And what are your recurring expenses? Utilities such as electricity, gas & water – how will retirement affect these bills? You may spend more time at home once you retire and thus use more electricity for heating or cooling or just keeping the lights on. Are there ways in which you could reduce this area of spending now?
How about medical costs? In Australia, we are lucky to have the Medicare system which ensures that you can access medical treatment if you need it. But it may also take years if the procedure required is deemed non urgent or elective. So do you need private health insurance? The older you are, the more expensive your private health insurance cover is.
Of course besides money, you need to work out what is of value to you; what you value in your life should determine how you want to spend your time in retirement. Then you can direct your money towards making that life a reality.
And this question – How much do I need to save before I can retire?
It depends entirely on how much you want to live on during retirement, as we have established above. The convention is to use the 4% rule which is to save 25 times your living expenses, assuming that your current living expenses will remain the same in retirement.
So we are back to needing to know what we currently spend on living expenses – which leads us to the need to track our expenses. If we don’t know what we are spending now on living expenses, we cannot work out how much we need to save before we can retire.
Tracking your expenses helps you decide which expense you can cut altogether or reduce
If we want to retire early, we need to know where we can save and where we can reduce or eliminate an expense completely. I thought I had a pretty good idea where my money was spent. But I was surprised by the cold hard facts since I started tracking my expenses six months ago. And by how much my expenses vary from month to month.
Did I really spend nearly $2000 on the garden last month? The answer is yes. I can write if off as a one off expense but the answer is still yes, I did spend that much on the garden last month. I replaced my crumbling fence, got rid of some plants & bought new plants but the biggest contributor was labour costs. I have outsourced my gardening for years due to lack of knowledge and time constraints. And frankly, I was too lazy on the weekends. By being aware now that I spend so much on my garden strengthens my resolve to learn how to garden and thus hopefully one day, sack my gardener! Plus I will be learning new skills.
Some months, you look at the expense figures with elation, sometimes in utter despair. Without knowing what you are spending if not per item, at least per category, you can’t make a concrete decision to reduce or eliminate the expense altogether.
Tracking your expenses makes you accountable to yourself
Emotionally we tend to hide expenses from ourselves. We may splurge on a dress and just conveniently forget about it. But if we record all our expenses, we confront ourselves with the truth.
When I saw how much I spent on takeaway food, bought lunches and coffee each month, I took action to reduce this expense. This was an easy one for me to tackle first. I love cooking but struggled in finding time to be organised; to decide on what to cook, when to cook, when to shop. So now I keep it simple – cook two dishes on Sunday that takes care of lunches and dinners to Thursday. And celebrate on Friday evening by cooking a fresh meal with leftovers for Saturday. I go to my parents for a meal on Sunday and take leftovers for 2 more meals. What keeps me motivated is seeing my expenses decrease after I take action. I am one step closer to retiring early.
Tracking your expenses helps you spend with intention
That muffin is going to come up as a line item – do you still need it? Tracking my expenses teaches me to be mindful about what I spend my money on. I don’t automatically get a muffin with my coffee anymore. In fact, a good side effect is I now eat less baked goods after I eliminated takeaway coffee from my expenses.
Related: Frugality Attempt
I ask myself before handing money over if it is something I need. Or in the case of fresh food, if I would use it before its use by date, thereby reducing waste.
What I use to track my expenses
Personally I don’t like giving my bank account numbers or credit card numbers to third parties. So I use the free app from ASIC’s Money Smart website – TrackMySPEND.* It may not have as many categories as some of the other apps but it is sufficient for me. As you start reducing your expenses, the less transactions you will have to enter.
If you don’t already track your expenses, I encourage you to do so. It definitely helps you to focus on what is a necessary expense and what perhaps you can do without. It is exciting at the end of the month to celebrate your wins and look at ways to improve on the other areas.
*Edit – this app is no longer supported and not available for download anymore. These days in 2021, I use WeMoney app (affliliate link – we both get $5 and they plant a tree when you sign up using my link and connect to a financial institution) I have also gotten over handing my bank account details to a third party for the convenience of being able to see everything in one place on my phone.
