Annual Expense Reviews - A Good Idea
Track Your Annual Expenses To See How You Are Doing
Welcome to Saving Money with Andrew!
The world is filled with books, spreadsheets, and apps for budgeting and expense tracking. But relatively few people carefully track expenses, mainly because it is boring and time-consuming.[1]
At the other extreme, there are many “financial aggregators” that will let you enter all your online account logins (bank, credit cards, etc) and track expenses automatically, most notably Mint, which I used for several years. However, I soured on these services for security and privacy reasons. I also found these services made it so easy to aggregate data that I was actually skipping the critical step of actually thinking critically about each of our major household expenses, instead just admiring the pretty-looking charts and tables they make for you.
By contrast, I’ve found a fairly simple process of tracking annual expenses quite useful for staying on track for financial goals, along with finding “leaks” in our finances. Here’s what I do. Warning - this requires at least basic skills using a spreadsheet, though you could do this with a pen and paper if you *really* wanted to.
First, I download a CSV or file including all of our bank transactions for the year. If you use a major bank that offers online access, this should be relatively easy to do through the bank website. If you use more than one bank account, make sure to download your transactions from each website.
I open the file in my spreadsheet app of choice. I use Google Sheets because it is free and easy to collaborate with others, Excel or other options are fine too.
I go through the transactions, deleting anything other than transactions representing actual expenses (paying credit card bills, rent payments, checks, ATM withdrawals, etc). For example, I delete moving money back and forth to investment accounts or other savings.
I add up the total expenses to calculate our total spending for the year.
I start sorting the expenses into individual categories, subtracting each dollar amount from the total to make sure I am accounting for everything. Certain expenses that are paid directly (e.g., rent) are very easy to calculate. For others it may be necessary to go to your credit card account online and use their expense tracking tools, or make estimates.
Once I’m done with this process, I do a few things:
I compare our annual expenses (in total and by category) with prior years, trying to determine considering whether any increases are related to “lifestyle creep” or have a logical reason (increased medical expenses, family expenses, etc)
I see if there are any large unaccounted-for dollar amounts remaining after grouping expenses by type. These might indicate “leaks” in our budget, or mistakes in our calculations.
Finally, we have a family meeting where we briefly go over the expenses for the year (I use Google Sheets’ helpful charting features to make some basic line and pie charts), and talk about any changes we’d like to make next year.
I’ve found this process really helpful each time we’ve done it, particularly in helping identify some areas where spending had increased significantly (e.g., groceries, online subscriptions, etc) and focusing us on cutting spending in those areas. I also find it reassuring to feel more in control of our spending.
On the negative side, one of the things this process showed us is that a large percentage of household expenses are not easily controllable, particularly rent, childcare, and insurance/medical expenses.[2] I’ll try to talk a little about saving on insurance/healthcare in a future post, but one has to acknowledge the reality that there’s only so much that you can (or would want to) do to economize on these things.
Even so, doing an annual expense review has been a great way of seeing how we’re doing and identifying opportunities to save, at a relatively low time cost.
I hope this has been helpful. If you liked it, please share it with a friend! Also, please send me your feedback, requests, and success stories.
[1] On the subject of time-consuming budget-tracking methods, I enjoyed this article about kakeibo, a time-honored Japanese method of analyzing expenses. It sounds great to me, but I can’t imagine doing it and I’m a fairly patient person.
[2] This is well beyond the scope of this post, but the data show that these critical expenses account for a substantially increased percentage of household expenses over time (some interesting data here from the BLS and from Brookings), making budgeting and saving money meaningfully more difficult today. There’s a lot to be said about the impact of these trends on marriage/childbearing/household formation and inequality, but it starts to get political very quickly, so I will stick to the money saving topics for now.