You Can’t Manage What You Don’t Track

I titled this article a bit tongue-in-cheek as this is one of the aspects of working for a large corporation with many layers of management that I despise.  I spend a few hours each week simply documenting what I did that week for my manager.  There are times that I spend more time documenting a task that the time it actually takes to perform that task.  It’s this level of micromanaging that is one of the downfalls of working for large corporations and why they are not nearly as nimble and productive as small businesses and start-ups.  There is one place however, where it is important to track every detail as to gain a deeper understanding of the situation…your spending.

I summarized this in the Path to Financial Independence as one-half of the equation for determining when you are financially independent and can leave the rat race.  You first need to determine where your money is being spent in order to know how much you need to make to cover your spending.  To make things as simple as possible, I think there are only 2 steps needed to track all of this spending:

Have a single checking account from which all bills and other spending is ultimately withdrawn from.  What this means is if you have credit cards that you use to buy things, ultimately use this single checking account to pay your credit card bill.  And if you use cash to buy things, withdraw this cash from this single checking account.  This makes it easy to track your monthly spending because everything ultimately is being paid from a single account.  I have 6 sources of withdrawal from my single checking account:

  1. Electricity bill
  2. Credit card bill (I only have one credit card that I actively use)
  3. Cell phone bill
  4. Gas bill
  5. Cash
  6. Checks (things I can’t cover with my credit card or cash)

You may have additional bills and sources of spend than the six I have, but you get the idea.

Use a spreadsheet to track and tally your spend from your single checking account.  Have a row or column dedicated to each of your categories from above and then tally up the total of your spend for each month.  This will allow you to understand exactly how much you are spending each month.  Do this for every month going forward and you’ll get an average of what your monthly spend is.  I’ve been tracking my expenses for a little of 4 years now, so I keep a monthly average of all time and a running 12 month average.  They are pretty close in my case, but it’s best to use the larger of the two numbers to understand what your monthly spend rate is.  Once you have this number, half of the equation is done, now you just need to focus on how to generate income to cover this number.  I prefer stock market investments as I’ve laid out in Stress Free Way to Generate Passive Income.

These 2 steps will set you up to be able to use your own life data to drive both financial optimization in terms of reducing spending and how close you are to financial independence.  Remember that as you reduce spending, you also reduce the amount your need to cover your spending and the closer you are to financial independence.