The first step is always the hardest; and when it comes to personal finance, that’s tracking the budget.
The truth is, most people don’t want to know how much they spend – it can get downright horrifying. And even if you do know, it’s hard to control or restrain it.
Here are some simple methods to help.
1. Reverse Tracking
With most budgets, you track the expenses first, and then see if they match up to your budget. Reverse tracking does it the other way around. With this system, you plan the budget first, and then deliberately restrict the cash for each expense. For example:
Say that, rather than track how much you spend, you create a spreadsheet of how much you should be spending. You then restrict the money you have available, for each expense. So if the planned budget says lunches can’t exceed S$5, then you’ll make sure you only have S$5 in your pocket when it’s time to go out for lunch.
At the end of the day, you make a note of all the times you’re forced to spend more than planned, on a particular item. So if you planned S$200 for groceries, but spent S$250, you’d mark that down in the spreadsheet.
At the end of the month, you’ll have a clearer idea of where your major cost overruns are – you’ll be able to see, for example, that you’re spending much more than acceptable on groceries or petrol.
You can then either cut down on those expenses, or expand the budget in those areas (take the money from expenses that you find are easy to control).
The upside to this method is that you’re cutting back, even as track your expenses. It’s also convenient, as you’ve pre-allocated the cash; you don’t need to note down where every dollar goes.
2. Targeted Tracking
For most people, it’s impractical to literally track every expense. Targeted tracking is an easier approach, and allows you to make a major impact on your finances with less fuss.
Using this approach, you only track two specific types of expense, which you feel are the highest every month. For example, food and sailing (if that’s your hobby). You then take note of the major expenses in these areas, and try to lower them until the overall amount spent falls by 10 per cent.
For example, say that the total amount you spend on food each month is S$500. You could aim to lower this to S$400. Using targeted tracking, you would pay attention to how often you eat in restaurants, which restaurants you spend the most in, how much your lunches cost, etc. You then alter your activities until the overall cost falls to S$400.
Targeted tracking and budgeting is easier than trying to control every facet of your spending. You just have to be careful that, when you save money from the targeted expense, you immediately set it aside as savings; otherwise you might end up spending it elsewhere.
3. Self-enforced Accountability
This system is good for beginners, who find it hard to develop a tracking habit. You may need the assistance of a spouse, or a parent if you’re a teen.
Begin with a fixed allocation of money for the month. At the end of the month, you must present the receipt for every purchase you’ve made that month – even for small items such as canned drinks. For every receipt that you cannot produce, you must decrease the next month’s allowance by that amount.
For example, if you allocate S$2,000 for the month, but you cannot account for S$37.50, then the maximum budget for the next month is S$1962.50.
Besides punishing yourself into being more disciplined, the “losses” are actually put into your savings, thus helping you to conserve money over the year.
At the end of the year, you’ll also develop a better sense of where most of your expense go, as you can see the collected receipts. You’ll also develop a habit of keeping receipts, and a habit of tracking expenses.
This method is particularly good for teaching children and teens to be accountable. For parents, it has the added benefit that you can see what they’re spending on. Children are also less likely to spend on illegitimate items (e.g. illegally buying cigarettes) as they know that such expenses won’t be reimbursed for a long time.
4. Use Smartphone Apps
These days, there are an abundant number of smartphone apps – such as Mint and Spendee – that can help you track expenses on the go. Some of them, such as PocketGuard, can even sync with your bank accounts to monitor expenses.
The main advantage is that budgets and savings are displayed in a more visual and immediate form, such as pie charts and bar graphs. It’s easier to picture how much you can spend on food when it’s expressed as a coloured bar, like a life gauge in a video game, than to mentally process the numbers.
The downside, of course, is that this is a tech solution, which requires you to have the gadgets on you all the time (but who doesn’t have a smartphone all the time these days?)
5. Let Your Bank do the Work for You
One easy way to track expenses is to go cashless. Make sure you make payments via debit card or credit card (but always pay back in full if you use credit cards, to avoid interest).
Your bank will send you a concise statement of expenses, at the end of the month.
All you then need to do is divvy up the expenses (e.g. categorise them into food, petrol, shopping, and so forth). The bank statement gives you an immediate snapshot as to how much cash is going out each month, while your breakdown gives you a hint as to where you need to cut down.
This is a quick and effortless way to track expenses, as you’re basically letting someone else do it for you. The drawback here is that, if you go cashless, you may be tempted to spend more. If you find this is the case, use one of the other methods on this list instead.
This article first appeared on SingSaver.com.sg.