Controlling Expenses

Money worries are back. In response to rising inflation in the UK, Bank of England has been forced to increase the base rate to 4.25%. That is expected to squeeze demand in two ways:

  1. Improving savings rate to encourage people to spend less and save more
  2. Increasing cost of borrowing – making mortgages more expensive

If you are worried about making money stretch till the end of the month then the first thing to do is: understand your spending.

The best way to understand your spending is to look at your sources of money. Generally, people have two sources:

  1. Income – what we earn
  2. Borrowing – what we borrow from one or more credit products

It is important to understand credit cards are not the only credit product out there. Anything that allows you to buy now and pay later is a credit product – even if they don’t charge interest.

Understand your Income and Expenses

Go to your bank account or credit-card app to understand how much money you get in each month, how much of it is spent and how much do you borrow over that amount. Most modern banking apps allow you to download transactions in comma separated values (csv) format or as an excel sheet. Many also have spending analytics that allow you to investigate the flow of money.

Once you have downloaded the data you just need to extract 4 items and start building your own expense tracker (see Excel sheet below).

Four pieces of information are important here:

  1. Date of Transaction
  2. Amount (with indication of money spent or earned)
  3. Categorization of the Transaction
  4. Description (optional) – to help categorize the transaction to allow you to filter

For the Categorization I like to keep it simple and just have three categories:

  1. Essential – this includes food, utilities (including broadband, mobile), transport costs, mortgage, insurance, essential childcare, small treats, monthly memberships. This is essential for your physical well-being (i.e. basic food, shelter, clothes, medicine) as well as mental and emotional well-being (i.e. entertainment, favorite food etc. as an occasional treat).
  2. Non-essential – this includes bigger purchases (> £20) such as dining out, more expensive entertainment, travel etc. that we can do without.
  3. Luxury – this includes purchases > £100 which we can do without.

The Excel sheet below will help you track your expenses. The highlighted items are things that you need to provide.

The items that you need to provide (highlighted in the sheet) are:

  1. Transaction data from your bank and credit-card (Columns A-D), this should be for at least 3 months – this is time consuming the first time as you will have to go through and mark each entry as category 1, 2 or 3 (see above). One you do it for historic data you can then maintain it with minimal effort for new data.
  2. Timespan of the data in months
  3. Income

This will generate the expenses in each category on a total and monthly basis (to help you budget).

This will also generate, based on the income provided, the savings you can target each month.

Note: All results are in terms of the currency used for Income and the Transaction records.

Things To Do

Once you understand what you are spending in the three categories you can start forecasting by taking monthly average spending in each category.

Tracking how monthly average changes over a few months will tell you the variance in your spending. Generally, spending rises and falls as the year progresses (e.g. rising sharply before festive periods like Christmas and Diwali and falling right after).

You can do advanced things like factor for impact of inflation on your monthly spending and savings.

Finally, once you have confidence in the output – you can move items between categories. This will allow you to play what-if and understand the impact of changing your spending patterns on your monthly expenses and savings.

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