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Tina Tehranchian, (R) Financial Planner meets with her client , Anna Zsolnay (L). (Sami Siva)
Tina Tehranchian, (R) Financial Planner meets with her client , Anna Zsolnay (L). (Sami Siva)

Budgeting

Tracking expenses can reveal inconvenient truths Add to ...

When Tina Tehranchian's son was a toddler, she thought nothing of splurging on expensive toys and outfits for him. It wasn't until she evaluated her spending for a few months that she realized what a large dent her little guy was making in her wallet.

"When I sat down and tracked my expenses I noticed that I was spending more money on buying him toys than I was saving for his education," she said. "That was a shock to me."

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Now a certified financial planner with Assante Capital Management in Richmond Hill, Ont., Ms. Tehranchian knows first-hand about the importance of recording one's spending as part of a comprehensive savings plan. Most people have only a vague idea of where their money goes every month, and the only way to find out is to track it - right down to the nearest dollar.

Now when she meets clients, one of the first things she does is hand them a blank cash-flow statement to fill out. "There are certain things that you uncover about how people are managing their money that may never come out if you do not engage in this exercise," she said.



Ready to track your spending? The important thing is to pick a method that works for you, says Vicki Robin, co-author of Your Money or Your Life. "The point is to do it. You can write it in ballpoint pen on your hand and transfer it to a little black book at home before you shower if that delights you," she says. Here are methods that don't involve writing on your skin:

  • Personal finance software: Programs such as Quicken allow you to track and analyze spending patterns. iPhone apps and Web-based money-tracking tools are also available.
  • Spreadsheet: If you're handy with Excel, it's a great way to track your spending.
  • Debit and credit cards: Make all your purchases with a debit or credit card, and track your spending via online or paper statements.
  • Pencil and lined notebook: Every time you buy something, enter the amount on a new line. Calculate a running subtotal every few days. That will make it easier to tally up your purchases at the end of the month.
  • The envelope system: Get a receipt for everything you buy, and stuff it in an envelope. At the end of the month, add up the damage.




In Ms. Tehranchian's case, the exercise led her to cut back on gifts for her son so she could contribute more to his education fund. She and her husband also decided they were spending excessively on restaurant meals, so they started brown-bagging their lunch.

In the old days, keeping track of one's spending meant carrying around a pen and notebook and religiously jotting down every purchase. While some people still prefer that method, technology has opened up new options for following the money.

Elizabeth, a 44-year-old marketing professional in Toronto, makes virtually all of her purchases with a credit or debit card. She then looks up her transactions online and enters the information into the Outlook calendar on her computer. Every week or so, she uses a spreadsheet to tally her expenses by category - groceries, car, home maintenance, restaurant meals, and so on.

When she and her partner tracked their spending for the first time a few years ago "it was an eye opener," says Elizabeth, who did not want her last name used. "We're going, 'Geez, look how much we're spending here.' Just picking up sushi was $40 for two of us."

Armed with the information, they were able to make some small but important lifestyle changes to save money. Instead of leaving work at separate times and taking two cars to their cottage, for instance, they drove together to save on gas. They also cut back on restaurant meals.

"I think it's a really good exercise to become aware of what you're spending and then what the opportunities are to save," she said. Having cut back where necessary, "We're pretty solid right now."

Some especially frugal people make expense-tracking a lifelong pursuit, accounting for every penny that goes out the door. But that's not necessary, financial professionals say. Three months is usually long enough to get a handle on where money is going - and where the problem areas are, says Becky Wong, a certified financial planner in Vancouver.

While some people use the exercise as a first step to setting up a budget, Ms. Wong said expense-tracking alone can have a dramatic impact on behaviour. When people become more aware of their spending - whether it's for a new wardrobe or a premium cable package - they often cut back automatically.

"I think it's very important because it forces people to be honest. There's no lying to yourself," she said. "I have people who dine out four times a week. Do you really need to dine out four nights out of seven? Do you use all those cable channels or can you get by with a basic cable package?"

Vicki Robin is one of the world's foremost experts on personal expense-tracking. The Seattle-based co-author of Your Money or Your Life: Transforming Your Relationship With Money and Achieving Financial Independence - first published in 1992 and now available in 10 languages - says tracking is an essential step to taking control of one's finances.

"Tracking is a way to put your hands on the steering wheel of any aspect of life that is out of control," she said. "Many people say they want to change, but if you don't have an accurate sense of how you are now functioning, what changes can you honestly make?"

Tracking is only the first step, she added. Once you have the raw data, it's important to ask whether the expenses "actually bring you pleasure in proportion to what you've invested and/or if they are aligned with your values and goals. Such reflection on the data will take the change even deeper."

For Ms. Tehranchian, choosing to buy less expensive toys and clothing for her son proved to be the right decision. Her son, now 22, recently graduated from the Schulich School of Business and is studying for his masters in management in England.

"You know what? My son didn't suffer at all," she said. "He was just as happy with a $5 toy as a $50 toy and yet it allowed me to save properly for his education."

John Heinzl

Follow on Twitter: @johnheinzl

 

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