Track your expenses without sweating it out

For several years, I used to track my expenses religiously – partly because of my interest in personal finance and largely because I have an OCD on maintaining data, esp numbers.

From 2003 until 2007, I used excel sheets to manage my accounts. From 2008 onwards, I used Gnucash. Whichever the system or tool, the data is only as good as the data entry. And that can be time consuming! By 2012, I was pressed for time and it no longer made sense for me to track my expenses so religiously. Especially since I had good control over it and roughly knew my numbers. (I realized its way better to spend time on investments than on expenses.)

So I stopped tracking expenses in detail and instead devised a system to do it in a very simple manner. All I needed to know was the monthly / quarterly / yearly expenses in total. Details weren’t that important. Here is how I set it up.

1. Have 2 accounts

Create 2 bank accounts and designate one as an investment account and another as an expense account. Do not mix each other under any circumstance.

2. All income goes into investment account

Any income in the form of salary, dividends, sale of assets, etc are to be done only into the investment account. Also, all investments are done from this account – say mutual fund payments, stock purchases, etc.

3. Create an expense budget

I will not go into it in detail. Just create a budget that you are comfortable with.

4. Transfer budgeted amount from investment account to expense account every month

On 1st of every month, transfer the designated amount from the investment account to the expense account. These transfers should be the only deposits done into this account.

5. Pay all expenses only through expense account

Whether its your car insurance premium or credit card payment or online purchase, do it only through your expense account and NEVER using your investment account. Cash withdrawals for daily expenses should be done from this account only. Also, NEVER use this account for your investments like share purchases – this account is only for expenses.

6. When your expense account falls short, top it up

If you run out of money in your expense account in the middle of the month, just transfer extra money from investment account (never use investment account directly for expenses).

7. End of every month/quarter/year – track your transfers

Want to know your expenses? Just add up all your transfers from investment account. Plus starting balance minus ending balance in the expense account for the period.

That’s it. You got your expenses in total – and if you want more details, just dig into your expense account and you might get 80% of data you need. You don’t need to be 100% accurate with it.

If you are married, you could create another set of investment and expense account for your spouse and do the same.

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