Why and how to track living expenses

I’ve discussed or mentioned standard of living, budgets, and expenses in past posts, but I’ve never really gone into the specifics on why or how to track this stuff. I have a few friends who have asked me at various times how I do this, so this post will be my answer to that question in the future.

The Why

I track my living expenses so I know how much it costs me to live per month. This allows me to know:

  • If I need to be earning more income to pay for my expenses.
  • If I can make a large purchase like a house or car.
  • If I can add a new monthly service/expense.
  • Or how long I can go without an income if I quit or get fired.

These are questions that lead to a lot of worry and stress if I don’t have answers to them. That kind of stress reduces my happiness to less than it could be.

A less obvious point is that tracking my living expenses allows me to know how much of my income I do not need.

So, for example, I realized not too long ago that I needed less than 60% of the income I was earning. So I recently reduced my work schedule at my regular salaried job to 3 days a week.

I am voluntarily passing up 40% (2 days out of 5 days) of my potential income to enjoy those 2 days with my family. That’s a 3 day workweek, and a 4 day weekend, every week. It is an awesome schedule.

Just so no one gets confused or discouraged, Dividendium makes a teeny tiny amount of income, and I don’t spend any of it on my living expenses. I also don’t spend any of the income from my investments.

All of the income I spend on living expenses comes from my employer and my 3 day a week paycheck. All of my ability to work only 3 days a week is due to tracking my monthly living expenses.

The How

Fixed Monthly Expenses

First, make up a list of all your fixed monthly expenses and their amounts.

These are payments that are basically the same each month. Some examples would be:

Annual Expenses

Second, make up a list of all your annual expenses and their amounts.

These are expenses that you pay less often than monthly, like once a year, semi-annually, or quarterly. These are usually the ones that are forgotten when totaling monthly expenses. Some examples would be:

  • life insurance
  • car insurance
  • homeowner’s insurance
  • property taxes
  • income taxes
  • car registration
  • car inspection
  • annual medical or dental exams
  • annual IRA deposits
  • Christmas, birthday, and anniversary gifts
  • and so on…

Many of these are expenses that could be paid monthly, but that often get a discount for being paid annually.

Christmas gifts is almost always forgotten about until the January credit card bill hits. This will help plan ahead for that surprise, so the money is already sitting there waiting to be spent.

Variable Monthly Expenses

Third, make up a list of all your variable monthly expenses.

These are expenses or types of spending that you have that go up and down depending on the time of year, or how much you used the service that month. Some examples would be:

  • electric/water/trash bill
  • home gas bill
  • car gas expenses
  • groceries
  • pet expenses
  • baby expenses
  • and so on…

The amounts of these will vary throughout the year usually. For example, the electric bill for my house can range from $100 to $200 per month over the year.

Discretionary Expenses

Fourth, make up a list of all the things you like to spend money on that didn’t get listed above. These are things like:

  • clothing shopping
  • vacations
  • home furnishings
  • movies
  • concerts
  • eating out
  • coffee
  • and so on…

All expenses are discretionary really, but these are the ones that are obviously just something you chose to buy or pay for.

My wife and I budget $50/month each for spending on whatever we want. We also pay for each other’s Christmas, birthday, anniversary, and other gifts out of this amount.

Totaling Expenses

Add up all of the Fixed Monthly Expenses. This sum is the smallest your monthly bills could be each month.

Add up all of the Annual Expenses, and divide by 12. This gives you the amount of money you should set aside each month so you’ll be ready to pay the expense when it comes due during the year.

Add up all the Variable Monthly Expenses from the past year, and divide by 12. This again is the amount of money you should set aside each month to cover these expenses throughout the year.

Add up all the Discretionary Expenses for the year, and divide by 12.

Now, add all 4 of those numbers together. That sum is your Expected Monthly Expenses.

If that amount is higher than your current monthly paycheck, or the monthly paycheck you’d like to be able to live on, then it’s time to drop some expenses.

Unexpected Expenses

The above only accounts for expected expenses, expenses you know are coming at a specific time. Unexpected expenses are expenses you will probably have at some point, but you don’t know when and don’t really know how much either. These are things like:

  • home repairs
  • surgery
  • car repairs
  • fines or tickets
  • and so on…

Although you don’t know how much these will cost or when they will happen, you can still get an idea of how much you need to cover if any one expense happens. Generally they don’t all happen at the same time.

For example, the most you’ll have to pay in a given year due to an illness is the amount of your medical insurance deductible. Or the most you’ll have to pay for a home repair is your homeowner’s deductible. So I would take the larger of those, divide by 12 and add that on to your monthly expenses number from above. For me, this amount is an extra $500/month over my Expected Monthly Expenses.

This way, when you do have to make one of these unexpected expenses, you’ll either be able to pay it off in a year or less, or you’ll already have saved the money up to pay off the expense.

This gives a huge peace of mind benefit, since you don’t have to worry about how the problem will be paid for. I mentioned in a previous post how Taleb uses this kind of planning to avoid having little annoyances wreck his day.

The Rest

If after going through the list above, you still have extra income, the rest of your income can be used for investing, or you could choose to forgo the income like I did and enjoy your time instead.

Expenses Inch Up

The amounts for the annual expenses and the variable monthly expenses will generally go up each year. For example, our insurance premiums and our property taxes almost always go up some small amount each year.

So it may be that you haven’t set exactly enough aside for that particular expense by the time it comes due. This is fine. Pay the new amount by taking a little out of your Unexpected Expenses, and then recalculate your monthly expenses with the new amount.

Trip Ups Starting Out

Since we divide the variable monthly expenses by 12, we’re taking an average of the monthly expenses over the entire year. It’s possible when you just start out doing this, that the average expense amount will not cover the monthly expense amount, and you won’t have any savings built up yet to pay the excess.

For example, my monthly electric/water/trash bill ranges from $100 to $200 per month, but averages at $150. So if I started this in June, when my bill is $200, I’d find myself short $50. Next year though, I would have saved up the $50 during the spring months when the AC isn’t so necessary, and so would be able to pay those high AC bills without breaking a sweat. Ha.

Again, this can be covered by the Unexpected Expenses amount.

Swimming in Cash

Since you’re setting aside 1/12 of the money for some of the expenses and your Unexpected Expenses amount each month, you can end up with a gob of cash sitting in your bank account. For example, at some point during the year, I will have almost all of the $3000 in property taxes that I need to pay that year sitting in my bank account.

Don’t spend that money! It will look like it’s just waiting for a place to be spent or invested, but it’s not. It’s already got a place waiting for it. You’re effectively self-escrowing for all your annual expenses, just like the bank does for the property taxes on some mortgages.

One thing to do that might help keep it separate in your head is to move that money to a separate account. Most banks will let you setup a separate account where you can transfer money between your main account and this new account. Each month you could transfer the 1/12 expense to that account. And then withdraw the full amount from that account when it’s time to pay.

I use an internet bank account for this since they get a slightly higher interest rate. But it takes a while to transfer the funds back and forth, so it might be a better idea to use a separate account at your existing bank, since transfers on those are immediate.

Debt Payments

I would make any debt payments, like piled up credit card bills, part of my Fixed Monthly Expenses. You could put your Unexpected Expenses amount towards paying down debt, but I really don’t recommend that.

The reason is that when those Unexpected Expenses show up, you’ll already be stressed because of what they usually are. Either a medical issue, or a home repair, or car repair, or some other issue that’s probably already creating stress in your life just from what it is, and how much time you have to take off from work to deal with it, as opposed to how you’re going to pay for it.

Having that Unexpected Expenses cash just sitting there waiting to pay off the issue is often more comforting than knowing that you can borrow the money to pay for the unexpected expense.

Bi-weekly Paycheck

If you get paid every two weeks, as opposed to twice a month, you’ll always get at least 2 paychecks per month. But some months, you’ll get a third paycheck.

I would view those 2 paychecks as my income when considering if I can pay my expenses, or if I need to trim a few. And ignore the 3rd paycheck. When I get it, I’d just stick it in the Unexpected Expenses account, put it towards something else I wanted to splurge on like a vacation, or tell the boss I’m taking off another 2 weeks this year unpaid.

By doing this, I’m making sure that I can pay my expenses every month without issue.

You Created a Budget

Now you have a plan for what you think is how you spend your money. This is effectively a budget. Nice job setting that up!

Now we just need to make sure that it’s actually reflecting reality, and that you can actually follow it.

Analyzing and Tracking the Spending

The way I do this is to keep a spreadsheet of my budget, what I expected to spend. And on the same spreadsheet I record monthly what I actually did spend.

I do this by keeping my receipts for the entire month, and then sit down for an hour or so at the end of the month to total it all up, and add it to the spreadsheet.

The first month you do this, it’s immediately helpful to tell you if you missed any Fixed Monthly Expenses, or grossly misestimated how much you do or don’t spend on a particular expense each month.

And after a few months, you can see if you’re on track or if you need to make some adjustments.

And then after the first year, you have a really tight view of what your expenses are and where your money goes.


Let me know if any of this doesn’t make sense. It’s a really confusing and complicated topic, and most people would rather ignore it until it goes away. But it doesn’t.


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