This post is all about me.
I always thought writing a blog required a double-whammy of intellectual arrogance – firstly in assuming that anyone would want to hear what I have to say, and secondly that I could write about it in a way people wanted to read.
This post adds an additional layer of egotism on top of the usual, because it’s all about me.
Sadly, my quest for ultimate self-aggrandising glory is tempered by the fact that this post is about something as quotidian as tracking my spending.
Whether people will actually want to hear this or not I’m not sure. But as I’ve had a whole bunch of people download my finances tracker since I made it available a couple of weeks ago, I guess there must be some demand out there for personal finance advice.
If you like it, great. If you don’t, well, it’s free.
So here’s my story about why I started tracking my spending, and how it’s helped me.
Working for the cash machine
I used to feel a weird mix of embarrassment and boredom from tracking my spending.
Deep down I knew it was something responsible adults did. But even I cringed when it came up in conversation that it was something I did every month. What kind of dull, beige person tracks what they spend money on? Nothing says “I have no social life” like poring over bank statements and credit cards bills in your free time.
It gave off the impression I had a Smaug-like obsession with money, carefully penny-pinching my way through life in a single-minded attempt to grow my hoard. It’s not something which interesting, lively people with a zest for life do. You couldn’t find a better opposite of “carpe diem” than tracking your spending.
Despite being an invaluable practice for building wealth, it’s also a blazingly clear signal of not being wealthy. There’s no way Jeff Bezos sits around trying to reconcile his American Express bill. And in those deliciously hierarchical situations where everyone’s trying to coyly hint at how much they make without mentioning any numbers, saying “I track my spending” is about as bad as saying, “I eat roadkill to save money on food”. Apparently that actually happens.
Social stigma aside, on a personal level I also felt like tracking my spending was grinding me down. I was, in the words of the two-hit-wonder indie band Hard-Fi, “Working for the cash machine”.
I knew there were other things I’d much rather be doing, but the yoke of money was settled firmly around my neck, and was now apparently dictating my free time. I was supposed to be earning money so I could enjoy the time where I wasn’t forcibly manacled to my desk, and yet here I was on a Sunday afternoon plugging numbers into an Excel spreadsheet and wondering how to classify spending £300 on a new accelerator pedal.
What’s the point of earning all this money if just means you have to spend more time doing boring jobs?
Back in the days before I tracked my spending, I had no idea what happened to all that money I supposedly earned.
I didn’t know what I spent money on each month, and didn’t really care that much. As long as I earned more than I spent, then surely that was OK?
Then, and I can’t remember how exactly, but at some point I came across the concept of ‘financial independence’. And that sparked my interest in personal finance.
Financial independence is the idea of having enough income to pay your living expenses without having to be dependent on anyone else (e.g. your employer). I’d always considered this ‘retirement’, and something for people who had pill boxes with days of the week written on them.
But through devouring some excellent blogs, including The Escape Artist and Mr. Money Moustache, I realised that building up a large enough portfolio to cover my spending wasn’t such a difficult task.
Now, if you do any sort of reading into financial independence, you’ll inevitably come across a gloriously passionate collection of people involved in something called the FIRE movement – short for ‘Financial Independence Retire Early’. The FIRE crowd are fascinating bunch, notorious for driving up their savings rates to impossibly high levels and cutting their spending to almost zero, with the goal of giving the middle finger to their employer and riding off into the sunset on their second-hand government subsidised electric bikes.
Granted, I wasn’t going to pursue financial independence so doggedly as to adopt the same levels of frugality as some of the extreme FIRE crowd. I realised I didn’t really fancy re-using my dental floss, and I was quite happy to pay for hot water in my shower.
But I understood their motivation.
For me, it was more about the ‘financial independence’ than the ‘retiring early’. I enjoy working, I’d just rather it be on my own terms rather than someone else’s. In fact, it wasn’t even about the ‘financial’ bit. It was just about becoming independent.
While getting to grips with the ideas behind financial independence, I realised it was actually achievable, and not as far away as I’d imagined.
The more I saved, the sooner I’d be able to take control of my own time.
And that’s the reason I started plugging numbers into an Excel each month.
It wasn’t about being enslaved to your money, but just the opposite – taking control of it. And as I began to track my spending, I discovered that having control came with three other major benefits.
1) Spending more
One of the biggest misconceptions about taking an interest in your own personal finances is that it creates (or is maybe caused by) an attitude of miserly penny-pinching, dodging paying for rounds, and not spending money on anything which could be labelled as “fun”. But I’ve found it to be the opposite.
By tracking how much I spend, I can figure out how much I waste on worthless crap I don’t care about. And there’s a lot. Similarly, I can figure out how much I actually devote to things I do care about, and want to spend more on.
Through the act of measuring, the balance between the two naturally corrects itself.
The cliché management consultant adage of “what gets measured gets managed” is, although still as vomit-inducing as it was when I first heard it, pretty appropriate here. Through measuring, my spending habits gradually adapted to spending less on useless rubbish, which happily meant I could spend more on meaningful things I enjoyed, without any conscious effort on my part. It was just a matter of priorities.
Fewer limited edition Star Wars posters, and more holidays to Rome. And if you I’m using false-equivalence to prove a point, this Star Wars poster set will set you back £10,000 – more than I’ve ever spent on a whole year’s worth of holidays.
For a mere £10,000, these can be yours.
2) Being financially unbreakable
Ben Graham, Warren Buffett’s mentor and the guy who basically gave birth to value investing, said that “the purpose of the margin of safety is to render the forecast unnecessary”.
And the only way to build your own margin of safety is to understand your own finances.
After I’d figured out roughly how much I’d spend each month, I was able to tailor the size of my emergency fund – my margin of safety – to suit my circumstances. For example, if I figured out I spend around £2,000 a month, I’d know if I built a cash safety net of £24,000 I’d be able to survive for a year if I found myself without a job.
And losing my job is just one risk.
A severe market crash, encountering health problems, being a victim of fraud, to name just a few other financial grenades which may end up heading my way. Most likely, the thing that’ll hit me is the thing I can’t predict. And while each risk in its own right is unlikely to happen, given enough time at least one likely will. A small probability in the short run becomes a certainty in the long run.
Which is why a key tenet of my investment philosophy (shamelessly plagiarised from the great Morgan Housel), is to “save like a pessimist, invest like an optimist”.
And once all that saving like a pessimist had resulted in a comfortable margin of safety, the peace of mind which came with it was immeasurable.
At the day-to-day level, I now no longer have to worry about paying a bigger than expected bill, having to replace the boiler, or buying a new car. I know that, although my emergency fund is supposed to be used only in emergencies, if push came to shove I’d be able to cover any one-off expenses. Looking at the bigger picture, I also know that when something comes completely out of the blue, I’m in a great position to deal with it – whatever it ends up being.
3) Having “enough”
Alongside being able to better allocate my income and building up a margin of safety, tracking my spending also allowed me to figure out how big a portfolio I’d need to become independent.
Once I’d got to a point where I had a pretty good idea of how much I tended to spend on things, I was in a position to work backwards and figure out how large a portfolio I’d need to cover that spending. After playing around with some sustainable withdrawal rates (the percentage of your portfolio you can withdraw each year without your portfolio running out), it was possible to work out a rough estimation of the size of portfolio I’d need.
I found myself in a position where I could answer the notoriously difficult question of “How much is enough?”
Once my portfolio reached this size, I’d be independent. It was a light at the end of the tunnel – something to aim for. After reaching this point, I’d no longer be obligated to sell my time to an employer, but would be able to take control of my own time. I’d be able to choose what I worked on, when, where, and with whom.
And I think that’s a pretty good definition of being wealthy.
No silver bullet
Of course, tracking your spending isn’t a financial panacea. It won’t magically transform your finances overnight.
At the end of the day, all personal finance is pretty basic maths, and the maths becomes much easier if your earnings are high. You can try living off free samples for the rest of your life, but if you don’t earn anything then it doesn’t really make much of a difference. This seems to be the dirty secret of personal finance – the single factor which moves the needle more than any other is an increase in earnings.
But, unless we’re already financially independent, no matter how high our earnings are we’re all still reliant on someone else for our income. And tracking spending helps to ensure that income is being spent in a way which is congruent with our values.
For me, the combination of spending more on things I cared about, reducing financial stress, and edging closer to having “enough” were all valuable pursuits, and worth a few minutes of my time each month.
Before I wrap up, you’ll note that nowhere in this post have I mentioned the word ‘budget’.
Talking about budgeting is a massive waste of time. Nobody actually does it, and I’m not surprised.
Creating a limit on how much you should be spending on different things approaches personal finance from a “you can’t” point of view. This not only ends up feeling restrictive, it creates feelings of guilt and shame for spending on nice things. You’re basically spend-shaming yourself, which is a terrible way to live.
Because it’s so unpleasant to think about all the things your budget is saying you can’t do, it’s no surprise nobody does it.
Which is why I prefer to track my spending, rather than creating limits through a budget. There’s no judgement, no penalty for overspending, it just is what it is. I spent £200 on a new sleeping bag? OK. No problem.
It simply gives you the information, and allows you to make your own decisions on what you want to do.
Why I track my spending
On the downside, tracking your spending:
- Makes you sound like the world’s most boring person,
- Isn’t a particularly exhilarating thing to do.
But on the plus side, it:
- Brings you closer to not having to rely on being employed,
- Helps you spend more on things you like,
- Gives you the peace of mind in knowing you’re financially safe,
- Allows you to know how much is “enough”.
Tracking your spending isn’t about being enslaved to your money – it in fact helps you escape from a harsher master. It slowly loosens the shackles of employment, and brings your nearer to becoming truly wealthy – having the freedom to choose how you spend your time. It’s a sacrifice of a few minutes every month in the pursuit of having complete agency over your time in a few years.
Sure, I probably won’t be able to achieve financial independence as soon as I think. There will always be things I don’t see coming which will set me back. That’s just how life works. But by getting into the habit of making sure I’m saving enough each month, I’m not only able to inch closer to having “enough”, I’m also more likely to be able to deal with life’s unavoidable curveballs.
It gives me the combined benefits of allowing me to spend more on the things I value, makes my finances more robust to life’s plot twists, while at the same time bringing me closer to independence.
To me, that’s worth 20 minutes a month.
For those who are keen to take a closer look at their personal finances, I recently tidied up the finances tracker I use myself, and made it available for anyone to download (for free). I’ve designed it to be simple and easy-to-use, so feel free to give it a try and customise it to suit you.