Where is your money going?

How much are you saving each month?  How much are you spending each month?  Do you have any idea?

“I want to save more money in 2018”

With the start of 2018, many people are looking forward to earning and saving more money this year.  The problem is, many people have no idea where their money goes.  Those that make New Years resolutions to save more often don’t set any specific, achievable goals.  If one of your 2018 goals is to “save more money” and you’re not intentionally planning on how to do that, you’re probably not going to save more money.   

As Benjamin Franklin once said: “Failing to plan is planning to fail.”

Why do you want to save more money?
When it comes to saving more money, ask yourself what the purpose of saving more money will be for.  Setting specific goals will give you a better chance of achieving it.  You might want to save money for your emergency fund, a new home, a new rental property, your next vacation, or your financial freedom.  You probably want to save for more than one financial goal at a time.  If you don’t plan out what you want to save money for, you may be tempted to raid your savings for temporary pleasures such as concert tickets, a new iPhone or a new luxury purse.  

When do you hope to achieve your financial goal?
Once you list out your specific financial goals, then next step is to determine when you want that goal met.  By setting a timeline, you can plan ahead on how much you need to save monthly to reach your savings target.  After determining your set goal and timeline, it’s time to plan out the moves necessary to meet your savings. 

Let’s look at a financial goal like saving for a $12,000 home renovation or used vehicle purchase.  If you want to save enough by this time next year, you’ll need to set aside $1,000 every month.

Let’s look at the big goal of reaching financial freedom and optional retirement.  Mr. Money Mustache has written an epic post titled The Shockingly Simple Math Behind Early Retirement.  He has explained the math in easy to understand terms.  If you can save 50% of your income, you only need to work for 17 years to be able to retire.  This includes conservative estimates with 5% investment returns after inflation and a 4% safe withdrawal rate of your portfolio.  If your goal is retire after 17 years of work, you need to make the savings changes necessary to save 50% of your income.

Tracking your spending

Tracking your spending is one of the first steps in taking control of your finances.  Whenever people come to me to ask for advice or tips on how to save money, the first thing that I recommend is to track your expenses.  If you don’t track where your money is going, you can’t improve your savings rate.  I’ve had a few people just tell me that they just don’t have any time or patience to track their spending.  Years later, they are still struggling with debt and stressed with making ends meet.  I guess they’ll just have to set aside enough time to keep working forever.

The most important number when it comes to financial freedom is determining what one’s yearly expenses are.  If you don’t bother to figure that out, you’ll never know when you can reach financial independence with the option of retiring early.  With any other savings goal such as buying a rental property, paying for your next vehicle with cash, or maxing out your 401K, you will need to make and follow through with a savings plan.  In order to ensure that your savings plan is attainable, you need to know what’s going on with your money.

We manage our money like a business.  We use many tools available to us to help us track our spending, monitor our savings goals, and keep an eye on our investment progress.  We automatically track our spending with Mint.  We automatically track our investments and asset allocation with Personal Capital.  We manually track our spending with ClearCheckbook.        

Mint
Mint is hands down the easiest way to keep track of your spending.  I’ve been using Mint since 2007, over 10 years now.  To use the service, you simply input a login of all of your accounts: checking, savings, credit cards, investment accounts, and mortgage.  Mint will automatically categorize how much you're spending in various categories such as: bills, shopping, gas, groceries, dining, travel, medical expenses, and more.  

These are our spending categories for 2017.  Food & Dining (restaurants and groceries), Taxes (property taxes for our home and rental property), Fuel, and Pet expenses (our dog's medical problems) make up the largest portion of our spending.

Mint does require some fine-tuning of your spending categories every now and then. Mint also categorizes your sources of income such as paycheck, rental income, or bank bonuses.  You can also add any assets that you have such as real estate and vehicles.  Mint will approximate the values of your property with Zillow, or you can manually enter any value.  This allows you to see your entire net worth (assets minus liabilities).  As a bonus, Mint also provides you with a free credit score from TransUnion. 

Personal Capital
Personal Capital is the best financial tool to monitor your investment portfolio and asset allocation.  Managing your overall asset allocation of US stocks, international stocks, US bonds, international bonds, investment sector weighting, and alternative investments can be confusing.  Personal Capital makes it easy to keep track of your asset allocation and investment fees.  Personal Capital also has an easy to use retirement planner that calculates your likelihood of successfully retiring when you want to.  The planner provides feedback on how adjusting your savings rate and annual expenses can affect your retirement.  Personal Capital offers all of this for free.

Once you hit 100K of investable assets, a licensed financial advisor from Personal Capital will call you and see if they can schedule a free telephone consultation.  The advisor will take the time to discuss your financial goals and questions.  They will also discuss ways to improve your portfolio, reduce your fees, reduce your risks and optimize your taxes.  There is no obligation to speak with them and the phone call is free.  In addition to a telephone consultation, Personal Capital does offer professional investment management if you are interested or don’t want to manage your portfolio on your own.  You can sign up for your free Personal Capital account here. 

ClearCheckbook
For those looking for a manual way to balance accounts, ClearCheckbook is the way to go.  ClearCheckbook is a free online web based application that allows you to enter all of your accounts and expenses manually.  ClearCheckbook does not store any of your bank or credit card information.  

ClearCheckbook can keep track of all your checking, savings, credit cards, investment accounts, and more.  This helps me quickly monitor which categories I spend the most money on over time.  You can access the web application any time you have internet access.  There is an iPhone app, but I find the webpage much easier to use. 

While Mint and Personal Capital can automatically track expenses that have cleared, ClearCheckbook allows me to keep track of which checks have cleared as well as total restaurant expenses including tip.  I’ve caught a few instances of fraud such as when a waiter deliberately modified my tip amount and overcharges my credit card.  When comparing my bank statements, I can track down which checks haven’t been cashed yet.  It still amazes me how people can wait over 2 to 3 months to cash a check!  

If you haven’t started yet, make 2018 the year you start tracking your expenses
It’s time to start taking control of your finances.  If saving money is one of your biggest goals this year, it all starts by documenting your expenses.  Once you start tracking your money, you can work on improving your savings rate.  You may be shocked to find out where your money is going.  While tracking your spending won’t automatically save you money, (just like tracking your caloric intake won’t automatically help you lose weight), it’s a starting point.

Looking back at my expenses, I used to be incredibly wasteful.  I used to spend $75 a month ($900 a year) on dry cleaning.  I would spend an average of $900 a month eating out for lunch and dinner ($10,800 a year).  I would spend an average of $307 a month on gas.  If I kept my DirecTV satellite television service, it would have cost $68 a month.  Without tracking my spending, I had absolutely no idea why I kept living paycheck to paycheck every month. 

After I started tracking our spending, I could easily see what I was wasting money on and then begin to cut back spending on things that really weren’t that important to me. I switched to a garment steamer and stopped taking dress shirts and pants to the cleaners.  We bring our lunches to work and have reduced our eating out expenses by over 50%.  This is an expense we are looking to further reduce in 2018.  Without tracking our expenses, there would be no measurable way to improve our savings rate.  We haven’t lived paycheck to paycheck for a long time, and never wish to live that sort of existence again.    

Our monthly finances are now completely optimized and mostly automated.  I track all of our spending with Mint and ClearCheckbook.  I track all of our investments with Personal Capital.  Bills get paid, money gets saved, and contributions steadily flow into our investment accounts.  Once you have your finances in order, financial freedom is inevitable; it’s only a matter of time.