Expense Categorization, Trending & Budgeting

This blog will increase your awareness about income, spending and will help you set a budget and eventually a plan to manage your finances better, This is a fundamental step to help you implement higher concepts in my other blogs.

In this blog, we will focus on how to get better insights from your spending habits and be more aware on your expenses. This will help you manage your expenses better by providing a forecast for your financial needs. You would be able to run scenarios for a materially impacting event (like loss of job, purchase of a new car or home, marriage, college funding) on your finances.

Download Transactions

Most credit card and mortgage websites allow you to download the data as a CSV file. You can port this downloaded data to an excel file. You may want to setup about an hour every week to download transactions, categorize them and review trending reports. I have a template spreadsheet and linked reports available to get you started and you can send a note to me by clicking the Contact Us link.

Categorize Income and Expenses

Once you have the data formatted, the next step is to categorize your income and expenses. You can either define a few categories or set many categories. The former will provide lesser insights to trends and the latter will make the data over sensitive and lead to analysis of items that you don’t need to track. You need to find the right balance for yourself. The categories that I use for my personal analysis are below:

Table: Spending Categories

Segregate Mandatory and Discretionary Expenses

Each of the above expense can be categorized as discretionary or mandatory. Discretionary spending can be reduced significantly or stopped completely during a crisis whereas mandatory expenses can only be partially reduced but would have to be incurred. Examples of discretionary expenses are: Shopping, Entertainment, Travel and Donations. Examples of Mandatory expenses are: Taxes, Electricity, Mobile, Insurance premia and ongoing medical, dental or vision expenses.

Set Expense Budget

For each category, you need to set an expense budget. A butget is an amount of money you expect to spend during a given period. The period can be either a day, week, month, quarter, year or it can run into several years. More importantly you need to review the actual spending v/s budget each month and make adjustments to the budgeted amount every quarter or two. This step is important if you (or someone in your family) don’t have control over the spending. Once you have a good 2-3 years of historic data, you can see the trending of specific expenses and can correlate it to major finance impacting events. From future perspective, the trends can give you a good feel on the expected trajectory in the foreseeable future. This will help you get better control of your expenses.

Timing the expenses to income receipts will help you keep lower balances in accounts that don’t yield you good returns (like current and savings accounts). You will be able to make more accurate assumptions that are backed by data. This will help you spend judiciously and save more.