Understanding Your Finances

Expense Monitoring Is The 1st Step

There’s no way around it – how much money we can spend and save each month is a simple function of our income and expenses. Unless you plan on moonlighting at an emergency clinic or driving for Uber in your spare time, you probably have little control over your income. Sure, you can always see a few more cases or squeeze in an extra surgery, but how much extra income can you really generate? Since you cannot exert much control over your income, you need to understand and  control expenses.

Are budgets necessary?

Experts agree that a budget is essential first step in understanding and controlling finances. A budget ensures that you save for retirement and a rainy day, cover all your monthly bills, spend only what you have allotted toward any expense category and can sleep well at night – and yet only 4 out of 10 American’s use any sort of a budget. Why? Because it’s not easy! Let face it – if it were easy, everyone would be doing it! Probably the biggest obstacle that most of us face is knowing where to even begin. The second thing that throws people off track is when budget busting expenses come up, like when the refrigerator gives up the ghost. A few of these unexpected expenses and people throw up their hands.  But it doesn’t have to be quite so difficult. First of all, its 2019 – there are apps and web pages that help make the process easier. I cannot imagine how difficult the process must have been 20 years ago! More importantly, the whole process can divided into two easier to digest steps: Monitor spending and budget development. Today let’s focus on  the key element in developing a budget: expense monitoring.

How do I start monitoring expenses?

Monitoring expenses for a period of time is an important first step because it because it allows us to see where our money is going. This should be judgement free. Lets say you spend $300 a month on clothes, it’s not right or wrong – but maybe after seeing this you would decide to spend $100 a month on clothes and save the rest. Maybe you would decide to stop buying groceries spend more on clothes! The point is, that until you know where your money is going, you won’t be able to make these types of decisions.  The easiest way to start monitoring spending is to use any one of a number of Apps. You Need a Budget (YNAB), Mvelopes., Mint, Money Dance and Personal Capital, PocketGuard, and Albert are all popular budgeting apps, each with its own strengths and weaknesses. Although I plan on testing “Albert” in the near future (and will post a report), currently I use Mint. I use it partially because its free and partially because it’s been around long enough that I feel like Intuit – the parent company – can be trusted with my data. It’s also a very mature well developed product meaning it does what you need. It frequently wins “editor’s choice” in reviews of budgeting software.  Its available in a web version – which I feel is easier to use – as well as a smart phone app which is handy for spot checking.  Once you set up an account you’ll be asked to link you checking and credit cards. And then here comes the easy part – for the next few months just spend money like you normally do! After a few days the software will begin to generate easy to interpret reports like this one:

Hovering over a catagory will reveal the total dollar amount and the number of transactions. You can also inspect the individual transactions. 

One word of caution. When you first start using any of these programs they will do their best to categorize your spending, but they don’t always get it right. For example, I Venmo my kids their allowance. At the end of the first month Mint categorized all Vnemo payments as “dental expenses.” Apparently it was a bad month for my teeth!  Likewise my Walmart groceries came up as “clothes.” The software does learn and after correcting some entries you will get mostly reliable spending tacking.

Really, that’s about it. Just spend money for a few months – who isn’t particularly good at that – and see where it’s all going. Until you have this information, making a reasonable budget will be really tough.