How to track monthly expenses and manage them efficiently

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This week in ₹e-assemble, we shall discuss how to track monthly expenses and manage them efficiently. ₹e-assemble is a series on the basics of money management aimed at young earners. If you ask me now, “how should I track expenses?”, I would say, “do not track, instead invest first and spend later”. However, I am jumping the gun. I need to put myself in the shoes of a young earner and discuss the issue of expense tracking and management.

₹e-Assemble: a recap of the steps

Many of you may be on vacation this month or in the last week of Dec. Now would be a perfect time to work on these steps.

₹e-assemble by is a series on the basics of money management for yougn earnersStep 1: Listing your goals dreams and nightmares

Step 2: Lay the Foundations to Get Rich creating an emergency fund

Step 3: How to buy Term Life Insurance

Step 4: How to choose a suitable health insurance policy

              * Apollo Munich Optima Restore Benefit vs Max Bupa Re-fill Benefit 

              * Star Health Comprehensive Insurance vs Religare Care Comprehensive Insurance

              * Shall continue comparing policies.

Step 5: How to select a credit card for maximum benefit

Step 6: This post: tracking and managing expenses.

Step 7: Coming soon: choosing and managing debt/loans

Step 8: Coming soon: choosing accident insurance

Step 9,10 etc. : Coming soon:  Starting investing and portfolio management with examples from readers.

Why should we track monthly expenses?

Ask this question and you will get responses like: “it is good to know our spending patterns and analyze them”. Excuse me, but this makes no sense at all. If I am eating out four times a month, do I need to track restaurant bills or enter them in a mobile to app to understand that I am spending a good amount of money dining outside? Can’t we recall from memory that a good chunk of our salary goes “there”?

 Why do you need to track expenses to know your spending patterns? You are the one who spent the money. It is that hard to remember? If it is, you have a spending problem and tracking will not help.

My point is, when it comes to managing expenses, recording an expense after it has occurred has little value. We need to track expenses by budgeting and not track expenses by spending or staring at fancy pie charts. Understanding this difference is crucial to expense management.

How to track monthly expenses using the envelope system

There is a lot we need to learn from our parents. My mom and dad maintained an accounts notebook – several of them. So did my grandfather and my great-grandfather. Each month they did not record expenses in the notebook but accounted for them before the expenditure. That is, they budgeted for each expense using what is known as the envelope system.

Each month, dad would bring his accounts notebook and mom an array of dabbas. Dad would first copy the entries from last month onto a new page with the current month and year as the title. Then he would read out each entry. Mom would take out an amount and put it in a labelled dabba. The first entry was always “temple”. She would put Rs. 1/20/50/100 in a dabba meant to be transferred at an appropriate time to a temple Hundi. Next came milk – Rs. 300 went to a box named milk. Rs. 1000 went to a box name groceries (provisions, cosmetics etc.), Rs. 500 went to a vegetable box,  etc. you get the picture. These numbers are from a couple of decades ago.

This is known as the envelope system because at the start of the month we allocate a sum to each envelope/dabba for a specific expenditure. The idea is to not overshoot it as much as possible. My parents has an “extras” or “miscellaneous” dabba. This was a mini-emergency reserve for the month. If dal prices shot up or vegetables become more expensive, they would take some money from the extras dabba to handle the shortfall. They also had a leisure/pleasure dabba. This was for going to the cinema, buying me toys or books etc.

If there was a shortfall in the needs dabbas – milk, groceries, petrol etc. – they would use funds from extras. If there was a shortfall in the wants/leisure dabba, we just had to wait until next month. I am not making this up! This is how my parents handled family expenses for 31 years until my father fell sick with cancer. Then I and my wife took over. We continued to use the same dabbas but a few years, I started using a spreadsheet/graphing software for this (not excel). I still use that software and still have the file. Once I started goal-based investing, the envelope process became redundant and we no longer track any expenses now, only investments. That story is here: How tracking investments instead of expenses changed my life! This post also has a template of the tracker that I now use.

In the context of the post, look us consider the simple beauty of the envelope system. Notice you are not tracking expenses before the spending. Both needs and wants are budgeted into specific bins with a spares bin. If the needs bins are exhausted we can borrow from the spares bin. If the wants bin becomes empty, we sit it out. This obviously requires discipline, but so does everything else in life. The spending becomes organized from day one with no further need to track it after each spend.

There were times when mom and dad had to consistently borrow from the extras/spares dabba. For eg. due to temporary/permanent inflation, the amount they would usually allocate to the vegetable dabba was insufficient. After 2-3 months, they would allocate more the vegetable dabba.

Now consider the value of this information recorded over years. I can pick December and find out how the allocation to “vegetables” has increased over the years. Then I can calculate the average rate of year on year increase. This is known as inflation.

For example, allocation to vegetable in

Dec. 2015: 2000

Dec. 2017: 2500

Then 2500 = 2000 x (1+ inflation)  x (1+ inflation)  —> multiplied twice for 2 years elapsed

or 2500 = 2000 x (1 + inflaion)^2 —> ^ stands for “to the power of”

or inflation  = (2500/200)^(1/2) -1 = 12%.

This is how I was able to write this post: Inflation in India: Some Real Numbers. Here is an image from the post.

track monthly expenses and Inflation in india some real numbers
Calculation is from Jan 1995 to May 2014

I would strongly recommend that you use this simple Personal Inflation Calculator to understand the overall rate of increase in your expenses. It will help you become a better investor.

What are the benefits of using the envelop system to track monthly expenses

1: A system cannot make you disciplined. That is up to you. For those who can be disciplined, the envelope system gives a fantastic sense of purpose.

2: By binning expenses, we immediately know our limits and there is no need to track expenditure.

3: It ratifies expenditure for leisure but within limits (which you get to set!)

4: If you manage to not breach the limits of leisure spending and can wait for the next month, you develop a sense of delay gratification.

5: It makes you aware of inflation in a simple and direct manner.

I believe this system is superior to one in which spending patterns are analysed after the expenditure.

How to track monthly expenses: digital or non-digital means?

Whatever works for you, BUT if you are married or have a live-in partner and can stomach sitting 15 minutes together with that person, do it together. It is essential to manage and track expenses together and be completely honest about our spending.

What does tracking monthly expenses “efficiently” mean?

Whatever method you adopt, it should make you spend in a controlled manner. Wild swings in expenditure should be reduced.

your personal rate of inflation is the most important output of expense tracking. This will help you choose suitable investment products.

So what is the system you follow to manage expenses?

Do check out my books

You Can Be Rich Too with Goal-Based Investing, my first book is now available at a 35% discount for Rs. 258. It comes with nine online calculators. Get it now.
Cover-pinkGamechanger, my second book is now only Rs 149 (25% off).  Get it or gift it to a young earner 
Travel-Training-Kit-CoverThe ultimate guide to travel by Pranav Surya is a deep dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step.  Get the pdf for ₹199 (instant download)

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About the Author M Pattabiraman author of freefincal.comM. Pattabiraman(PhD) is the author and owner of  He is an associate professor at the Indian Institute of Technology, Madras since Aug 2006. Pattu” as he is popularly known, has co-authored two print-books, You can be rich too with goal based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management.  He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice. Pattu publishes unbiased, promotion-free research, analysis and holistic money management advice. Freefincal serves more than one million readers a year (2.5 million page views) with numbers based analysis on topical issues and has more than a 100 free calculators on different aspects of insurance and investment analysis. He conducts free money management sessions for corporates  and associations(see details below). Previous engagements include World Bank, RBI, BHEL, Asian Paints, TamilNadu Investors Association etc. Contact information: freefincal {at} Gmail {dot} com (sponsored posts or paid collaborations will not be entertained)
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Do check out my books

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingMy first book is meant to help you ask the right questions, seek the right answers and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.  It is also available in Kindle format.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You WantGamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantMy second book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at low cost! Get it or gift it to a young earner

The ultimate guide to travel by Pranav Surya

Travel-Training-Kit-Cover This is a deep dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step.  Get the pdf for ₹199 (instant download)

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