My friend and I were discussing, Your Money Or Your Life the other day.
There’s this cool graph where they extrapolate current earned income, current expenses, and investment income. At some point, investment income surpasses (hopefully!) expenses. At that instant, you’re financially free. It’s a profound idea.
As someone who has tracked expenses for almost 6 years, I’ve really struggled to apply the Your Money or Your Life view for myself. Maybe it’s because we’re 35 and have a new daughter. I can tell you firsthand, she has injected more financial uncertainty into our lives than I thought possible. Maybe it’s simply because financial freedom seems so far away. Or, maybe it’s because there is lots of volatility in day to day, week to week, month to month, or even year to year financial ins and outs. Let me show you what I mean.
Here’s our tracked expenses from Mint.com since 2010:
And here’s, my spreadsheet version…yes, I track things in 2 spots. Ugh, and I’m admitting that publicly.
First, they provide different results. Mint.com automatically bucketizes things. It’s super convenient, and I use it less for monthly tracking than for long term trends. I also use a modified envelope method to keep savings funds for things like home improvement/repairs, rental property expenses, insurance premiums, etc. My goal is to take big periodic cash outflows and bake small amounts of savings into my budget so that when the expense hits, I’ve already saved for it. Unfortunately, Mint doesn’t do such a good job of managing these type of periodic expenses.
My Excel version is completely manual and is really used tactically. How much do I have left in my budget for this pay period? Can I go out to lunch with the work crew tomorrow, or am I brown-bagging it? So, the bucket granularity is much different.
The first thing that jumps out at me is the upward slope of the trend-lines. Yes, our real expenses are increasing. That much is clear from both charts. So, is it time to finally cut the cable TV cord!? Should we start eating Ramen? Probably not. In this case, we’ve purchased our first rental property. That’s the big set of spikes at the end of 2015. And, our little girl is costs us way more than our two dogs do! So, while the upward trend is disconcerting, it’s also understandable given everything that’s been going on in our lives. To me, this is the power of tracking every penny you spend (twice!).
The real reason that I think tracking every penny still leaves you with uncertainty is the volatility. I put trend-lines into each plot to also illustrate how far from “average” our expenses are in any given month. Some months, they’re high. Some months, they’re low. This volatility also makes me pause when I try to extrapolate a trend-line 20 – 30 years from now.
I would like to explore this topic further in future posts. I think there is great wisdom in tracking one’s spending. I also think with thoughtful analysis, using income and expense trend-line extrapolation can reveal deep insight about one’s financial freedom trajectory.
Has anyone else tracked their expenses manually vs. using an automated tool like Mint.com? Have you tried to forecast your financial freedom point? What did you learn?