Saving and planning for your future can be daunting. There are so many aspects to our personal finances and each one of those facets has nuances that make understanding it all overwhelming. The good news is, planning for your retirement doesn’t have to be complicated and, at the risk of oversimplifying things, there is really one thing, that if managed properly, can drive the rest of your planning and behavior. This strategy is understanding and managing your expenses.
That’s right, simply knowing what you are spending on an annual basis and properly managing that spending is the most important step in putting a good long-term financial and retirement plan in place. As a Certified Financial Planner™ I know that all of the data we collect to build a plan is important, however, most data is not subjective or unknown. It’s easy to find out the balance of your mortgage, 401k, or savings accounts at any given point of time. These numbers are clear and obvious. However, accurately modeling expenses is usually a guesstimate by our members who tell us what their monthly bills are. Obviously, your expenses are far more than your monthly bills since gifts, auto repairs, holidays, travel, and many other expenses do not come in bill form but can be a large portion of one’s annual budget. Understanding every dime that comes out of your pocket throughout the year, not just your monthly bills, is the catalyst for financial success.
The good news is that in today’s world of data aggregation and smartphone apps, you no longer need to tediously enter receipts into an excel spreadsheet or complex accounting software. Much of the heavy lifting of tracking day-to-day expenses has been relieved with technology. Aggregator apps like Mint.com offer a free service that can tie your bank accounts and credit cards together and track your transactions in real time. Most of those transactions are even categorized automatically (although the service probably requires 15 minutes a week to ensure categories are properly accounted for). No longer is knowing what you spend a complex and time-consuming task.
If designing your financial future proactively is a priority of yours, start with your expenses. Track them, understand them, and manage them. Your future self will thank you!