At the most recent gathering of the Portland Integrative Finance Community (join for free here), we had a frank and engaging discussion about the challenges and the benefits of tracking your expenses each and every month, something I’ve done for years and espoused on this site over and over.
But just saying “track your expenses” is the beginning of the story, and there are plenty of questions that come up when figuring out exactly how to do this. (This is one of the topics that I cover through financial coaching.)
And one of the questions I was asked after the meeting was:
“What do you do when you have unspent money in a category at the end of the month?”
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I recommend that every month you track your expenses, listed under a number of categories. Categories like “Groceries”, “Transportation”, “Pets”, “Home”, etc. You can choose your own categories, but optimally I’ve found that you probably want between 6-12 of them.
After you’ve started tracking, you’re going to want to go back and create “targets” for each category. So say you’ve found that you spend about $300 on restaurants in a given month and you have enough money to cover that from month to month. You might then set a target of $300 and make sure that you never go over that value.
Now, targets only work if you stick to them. So if it’s the 28th of the month, and you’ve spent $300 already on restaurants, then you do not go out to a restaurant until the beginning of the next month.
A common topic is how to handle that situation where you run out of money too quickly in a given category. But an equally valid question is the situation where you get to the end of the month and you haven’t used your allotment of money.
Don’t misunderstand; this isn’t a “I have so much money that I don’t know what to do with it” kind of situation. This is much more common than that. It’s almost guaranteed in a given month.
Think about it. If you own a car, do you know exactly how much gas you’re going to need each month? If you buy clothes, do you know exactly how much you’re going to buy in a given month? Maybe you have a light month.
So this is a very practical question, and it brings up a number of questions for consideration.
Did you set your target too high?
It’s a fact that we are not great at creating category spending targets. We are especially terrible at it during the first few months of doing it, but even I—and I’ve been doing this for so long I can’t even remember when I actually started—routinely get the numbers wrong.
Much as we’d like to believe otherwise, every month is different, so each month you need to make adjustments from last month.
This is okay. Because you make the rules, you can change them. (The only rule you can’t change is the one where you don’t spend more than you make.)
Are there other category targets you find yourself hitting up against? Could you reduce one target and increase another? It’s not just an accounting sleight of hand trick; you are narrowing down your spending profile, learning more about what you do, and giving yourself the allowance to do so.
Perhaps next month you will get a little closer to your targets.
What do you with all that money?
Say you were under a category target by the time the month ends. What do you do with that money?
- Increase your float. Recall that float is the base value of money in your account. You start the month at that value, and if all goes well, you end the month at that same value. If you feel like sometimes your float isn’t enough to get through the month without some creative accounting (needing to pay some bills at certain times of the month based on your pay schedule) this might be a good option for you. Put a little more water in the pool, and float a little higher.
- Pay extra on your debt. Do you have debt? Yeah, I thought so. You could always throw this extra money at your debt. After all, you won’t miss money you didn’t expect. And did you know that over the course of ten years a one-time $100 paid against a 7% debt would save you $100 in interest, giving you a 100% bonus. That’s pretty cool.
- Add to your emergency fund. I don’t recommend having too much of an emergency fund when you’re still in debt, but you need to have something. But could you use more, especially if you have no debt? Probably. (As a reminder, here’s how much you need in your emergency fund.)
- Add to a savings account. I believe that having lots of different savings “buckets” are a good way of tracking against different goals. Whether this is something you need to do (like home repairs) or something you want to do (such as a trip to Belize), this could be a good way of congratulating yourself on a job well done in taking control of your financial life.
- Do nothing. You may find that you are over in some categories, but under in others, so that when you sum it up, the over/under becomes about zero. In this case, there may not be anything you need to do, aside from perhaps adjusting your targets for next month to be a little more appropriate. No need to over-engineer a solution here.
When you have extra money, there isn’t a universal answer on what to do with it, so you can pick the solution that works for you.
But enough about me. What do you when you find extra money in one of your categories?
And if you’re in the Portland metro area, join the Portland Integrative Finance Community. We’d love to have you!