Mastering the Art of Monthly Expense Tracking and Management

Published: August 24, 2023 at 6:00 am

This article discusses how to track monthly expenses and manage them efficiently. This is one of the steps in our Free ebook: Re-assemble Step-by-step money management basics.

If you ask me now, “How should I track expenses?” I would say, “Do not track; invest first and spend later”. See: How ten years of tracking investments changed my life. 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.

Why should we track monthly expenses?

Ask this question, and you will get responses like: “It is good to know and analyse our spending patterns”. 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 remember 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 that recording an expense after it has occurred has little value when it comes to managing expenses. We need to track expenses by budgeting, not 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

 


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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.

Dad would bring his accounts notebook and Mom an array of dabbas each month. 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 not to overshoot it as much as possible. My parents have an “extras” or “miscellaneous” dabba. This was a mini-emergency reserve for the month. If dal prices shot up or vegetables became 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 were a shortfall in the needs-dabba – 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, my wife and I took over. We continued to use the same dabbas, but a few years later, 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 tracked any expenses, 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.

Consider the envelope system’s simple beauty. Notice you are not tracking expenses before the spending. Both needs and wants are budgeted into specific bins with a spare bin. We can borrow from the spare bin if the needs bins are exhausted. 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.

Our book for kids on financial decision-making, Chinchu Gets a Superpower!” discusses this system in a way kids would appreciate it.

Sometimes, Mom and Dad had to borrow from the extras/spares dabba consistently. For example 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 of the vegetable dabba.

Now consider the value of this information recorded over the 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, the allocation to vegetables spend 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 expenditures.

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

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

5: It makes you aware of inflation simply and directly.

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. Managing and tracking expenses together and being completely honest about our spending is essential.

What does tracking monthly expenses “efficiently” mean?

Whatever method you adopt 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?

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Pattabiraman editor freefincalDr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.
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