How I manage our expenses, Laid Back Investor

What better way to start off this blog than with how I started getting more serious about my family’s expenses. The very first thing you have to do if you’re not already is have a centralized place to track your daily expenses. For me personally I use mint.com — it’s one of the first players in this space and while it’s not perfect, it’s pretty darn good and you can customize a lot of things to meet your needs.

Initial setup and evolving categorization

With Mint, you connect all your bank accounts, credit cards, loans, investments, and property and you’ll get a pretty good snapshot of your overall income and expenses very quickly. They will auto-categorize your transactions into a dozen or so groups but about 5-10% of the time they guess incorrectly, so you do have to monitor new transactions and update categories as needed. For your initial setup, just go through the Transactions tab and review each transaction and update accordingly (this may take awhile but it’s worth it!). Once it’s up and running, I set a reminder to review them once a week so I don’t have to do too many at once.

Next, head over to the Budgets tab. It’s been so long that I don’t know if they set up any initial ones for you, but this has been where I’ve evolved my strategy the most over the years. I initially put budgets around nearly every category and sub-category because it only tracks progress against defined budgets, while everything else goes into an untracked bucket at the bottom called…”Everything Else”. Policing expenses that granularly ended up being too high maintenance for me. It’s great to see everything in one place though. It allows you to be very aware of where your money is going, and allows you to trim back unnecessary expenses. I ultimately decided that I didn’t need to see my known, mostly fixed cost, recurring expenses so I removed those budgets entirely (and now I categorize those as a custom Recurring Bills category). After several other variations, I ended up consolidating a lot of the other budgets into some top-level categories (which include all expenses for sub-categories) that I can manage most easily.

The final budget categories I landed on are:

Auto & Transport
Food & Dining
Shopping
Travel
Entertainment
Health & Fitness
Kids Activities

Overview and disposable adjustments

Some people may want to stop there, at least for a while, but I continued. I created a separate spreadsheet with three sets of columns for income, savings (always save for yourself first), and then expenses. Under expenses, I have housing (including any car payment), itemized recurring expenses, and then the top-level categories from Mint with the budget amounts listed, which I bucketed as “Disposable”. Now you have an overview of everything in one place and can see how much of your income is spoken for already between housing and recurring expenses and how much you have leftover for any additional savings and the disposable categories. It’s very likely that you’ll need to adjust your disposable budget amounts to ensure you’re spending less than you earn (minus what you save). I personally combine the last three categories above under “Other” in the spreadsheet view as they can be pretty fluid between each other. Make sure you go back into Mint to update the budget amounts there once you’ve landed on the right mix.

Finding hidden expenses

Many people skip this next step but I think it is pretty critical. With everything we’ve discussed so far, you have a good grasp on your monthly cash flow (income minus expenses), but you don’t have a handle on annual expenses yet. Some of them may be obvious while others are not. What I do is have a second tab that tracks every expense over $100 in each month, and I split them into recurring and non-recurring columns. I look for these from the Budgets view so I don’t include any recurring expenses in there. At the end of the year, you have a great list of where you spend your money.

With this list, I group any similar ones and create a new Annual Expenses list on the first tab of my spreadsheet with associated costs. Now you have additional costs that you need to be saving for. I divide the annual expenses by 12 for a “monthualized” amount that I need to weave into my budget. This amount should be put aside into a savings account each month, or if you’re fortunate enough to get a bonus at work, you can put aside a chunk of this at the beginning of the year. You will likely have to adjust your disposable budget amounts yet again to ensure you can afford these somewhat hidden expenses.

My annual expenses, for example:

Any annual memberships (AAA, museums, etc)
Birthday parties (these often hide as just expensive restaurant transactions)
Car and any other insurance not included in your mortgage payment
Car registration for city and state
Child aftercare, seasonal activities, and summer camps (it’s easier to shoulder the expense if you spread out these costs over the whole year)
Donations
IRA contribution (I do an annual contribution but you could do monthly)

Summary and maintenance

In summary, do the following to get control of your budget:

Centralize and categorize your transactions
Determine which budget categories you want to review regularly
Look at what you can actually afford and adjust budget amounts
Seek out non-monthly recurring expenses and ensure you budget for them

It sounds like a lot, but it doesn’t take a lot to maintain. Here’s what I do:

Once a week, review all new transactions since your last review. Update any transaction categories as needed, then look at your budgets to see if you’re on track or need to slow down spending in any of them.
Once a month, review the previous month and see how you did. Look at the budgets to see where you went under or over, then review all transactions in each category to look for new hidden recurring expenses. Over time you’ll get better and better, I promise!