My main motivation in writing this blog is that I have seen too many people, both well into their career and just starting out, who are intimidated by personal finances and as a result don’t take actions that are critical to their financial well-being. This can have major implications when compounded over the years and may result in you feeling stuck in a career or living paycheck to paycheck even after a long and successful career. Maybe it’s just a matter of knowing what those steps are and while it is certainly easier to do this early in life, it’s absolutely never too late.

Building a healthy financial baseline takes 3 things:

1. Earning
2. Saving
3. Investing

Today we are going to talk about saving. I don’t prescribe to the hyper-frugal, penny-pinching, minimalist branch of personal finance. I do, however, think being intentional about your spending decisions is a crucial step along the path to a healthy financial situation.

I think spending in moderation (especially on experiences) is not something you should feel guilty about. It’s overspending and unnecessary spending that can get you in trouble (especially since with taxes it is easier to hold on to money than it is to earn it). Anyways, one of the most helpful things for me when it comes to saving has been becoming aware of how much I spend and on what. I started tracking my monthly expenses about a year and a half ago, and it’s been VERY eye-opening.

Why track your savings?

There are quite a few benefits here:

1. You’ll notice when you have a particularly extravagant month, what caused it, and can course correct if needed
2. It gamifies savings, which makes saving money way more fun
3. You will know how much you can invest monthly and can create an automatic investing system
4. Subscription charges will never be a surprise to you
5. You can quickly catch mistaken charges
6. You will be more efficient with your money

You can try and do this automatically with services like Mint & Personal Capital, but I have found that they frequently mischaracterize expenses (especially things like Venmo transactions splitting rent, etc.) so I prefer to do this manually in excel. It takes me maybe 15 minutes a month, so is very worth it for me.

Every month I will look at my credit card transaction history, checking account, Venmo account, etc. and categorize the payments into several categories:

1. Food
2. Rent (incl. power, internet, etc.)
3. Insurance / health
4. Car (incl. ride-share)
5. Going out
6. Entertainment
7. Amazon / clothing
8. Misc.

I have separate sections on a page for each month (and an annual summary at the top) and separate excel tabs for each year. If you want my template subscribe/share the blog and comment your email below!

Tracking your savings over time

One metric that is helpful to track is your personal savings rate:

A higher savings rate will help speed you along the path to financial independence. Check out a post from one of my favorite personal finance bloggers, Financial Samurai, on how to think about your time horizon to financial independence as a function of your savings rate here.

Despite the pandemic associated job losses, 2020 was actually a great year across the US for savers (see below) due to stimulus/unemployment payments and lockdowns, but that is unlikely to persist after things re-open. If you want to create a healthy financial baseline and achieve financial independence, you will have to find a way to increase your savings rate above the 6-8% non-pandemic average rate.

For context, if you make $100K / year (~$80K after taxes) and have a 7% after-tax savings rate, you are saving $5,600 / year. (Making some simplistic assumptions) If you saved $5,600 / year every year between the age of 22 and 60 and had consistent 5% growth in your portfolio, at a 2-3% safe withdrawal rate in retirement that would only let you withdraw ~$13-$19K / year or $1K-$1.6K / month (and that is after a 38-year career making 6-figures). Of course, there are a lot of other factors at play here (tax advantaged savings, social security, changes in salaries / expenses over the years, etc.), but the point is that it is an helpful metric to track for yourself to understand your own retirement planning.

Everyone has a different baseline here, so focus on the trend rather than the starting %. You may be at a 6% savings rate or less today. You may be aggressively paying down student/credit card debt (which you should do to avoid large interest charges), but what can you do to make that savings rate 10% in 2 years, or 20% in 5 years? Sometimes it’s cutting out expenses (can be as simple as making your coffee at home or as complex as moving to a lower cost of living city), sometimes it’s increasing your income (finding a new side hustle, negotiating a higher salary, etc.). Figure out what works for you. I am always happy to help brainstorm ideas.

My 2020 savings

2020 was obviously a unique year given the pandemic. I cooked at home a lot more, didn’t go out (no more $10 drinks out…), didn’t pay for a gym membership, took almost no Lyfts / Ubers, etc. All-in-all I saved much more than usual. This allowed me to achieve a 75% savings rate! That being said, I still had better and worse months. Overall, in 2020 here is where I spent money (as a % of my total expenses):

Here is how I did by month:

A very strong start to the year made it look like my expenses spiked towards the end of the year, but I have found my sweet spot around the June / July numbers (~70% personal savings rate). I have also found that I have improved this rate each year that I have been working by lowering my expenses despite increasing my income.

Improving your savings rate

There are two ways to improve your savings rate, lower your expenses or increase your income without proportionately increasing your expenses. Here are the strategies I have employed for keeping my expenses at a reasonable level in 2020 (and what I will try and do going forward):

Food: 25% of expenses

• Continue cooking at home even after we go back to work. Pre-pandemic, I would average ~10 meals out per week (eat lunch out on workdays and eat out once or twice a day on weekends) at $10-20 / meal. That is ~$600 / month. I could replace that for ~$200 or less with groceries. I’m not advocating for not eating out, but watching how frequently I do is a good step in the right direction and much healthier

Rent: 50% of expenses

• Living with a roommate or two is great. Living with your significant other is even better…I pay 30% less in rent now than I did back when I was living with 2 roommates. If you bought your own place a couple years back and are living in it, maybe renting out a bedroom to pay the mortgage, and have recently refinanced…kudos. You made a very smart call

Insurance / health: 4% of expenses

• Spend what you need to here. I am all for investing in your well-being. It will pay dividends later
• If you do plan to start buying fitness classes when things restart, just be conscious of how much you are paying for them, take advantage of free classes, bulk discounts, etc.

Car: 1% of expenses

• I don’t own a car anymore so this one is easy. If you live in a city that is easy to get around in, walk / uber / bike your way everywhere. Cars are expensive. You pay for the car itself, which quickly depreciates, maintenance costs, gas, insurance, parking, other state fees, and more
• If you do need a car and live with a significant other, consider just having one car (what I am currently doing). You can cut parking costs in half, and most of the time you are likely going to the same place anyways

Going out / drinks & Entertainment: 0% & 5% of expenses

• Well…these are probably pandemic anomalies so not putting much emphasis here. In general, I’m a big fan of drinking before you go out, but given it has been so long I don’t really have many thoughts
• I am very much looking forward to spending on sporting events/concerts after the pandemic so I am planning for the entertainment category to go up. Spending on experiences is usually worth it in my opinion

Amazon / clothing: 5% of expenses

• Another category I just haven’t had much reason to spend on this past year. When you dress in a sweater over a t-shirt and sweatpants all day you don’t really have a reason to spend money here
• In general, though, not enough people utilize things like Poshmark for clothes. Buying new for certain pieces of clothing is a bit overrated in my opinion. Then again, I’m certainly not a fashion expert

Misc.: 10% of expenses

• Important to remember that a lot of expenses will come up as one-offs. Donations, gifts, random mountain weekends. Don’t forget to bake in a little flexibility in your planning

I fully expect many of these categories to increase after we all emerge from this pandemic (honestly, I can’t wait). I am guessing the back half of 2021 will be me figuring out my new baseline (I am also moving to Boston, and will post on the true costs of moving, so there will be changes in my cost of living associated with that). After that though, I will have a good idea of what ‘2-3 months’ cash on hand will look like for me and can re-create my automated investing plan.

Let me know if you have any other helpful strategies for expense tracking / managing your expenses!

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