Stories | February 9, 2015

The simplest way to manage your money better

You might think that tracking spending sounds a bit dull. But taking note of items bought and money earned is a simple thing to do, and many people swear by it.

Taking note of items bought and money earned is a simple thing to do, and many people swear by it. 

Tracking spending as a way to something bigger
There’s a striking study from the United States in which a group of strangers in the 1990s were asked to rate teachers by watching short silent videos of them teaching a class. Although they never attended the classes, or even heard what the teachers were saying, their ratings matched end-of-year ratings by the teachers’ real students. It seems they were able to accurately evaluate something based only on limited exposure to it.

Termed “thin-slicing” , the idea was discussed at length by an American journalist, Malcolm Gladwell, in his book Blink. The principle of thin-slicing can also be applied to personal finance. Evaluate whether a person is sensibly managing their money not by whether they attend financial literacy classes or invest in complex stocks and bonds, but simply whether or not they track their spending.

Tracking spending as a way to improve
To quote the scientist Lord Kelvin (who, remarkably, started university aged 10 in the 1830s) “if you can’t measure it, you can’t improve it”. Tracking daily expenses is a way of measuring – with the next step being the improving. Most traditionally, tracking spending is done using pen and paper. Others might download an online template of a spreadsheet. Apps such as Spending Tracker and websites such as automate the process further and have added features, such as the ability to set reminders and savings goals. The move to use cards and contactless for swift payment can make tracking easier – but beware that using cash alternatives may have unintended consequences, such as making it easier to spend more without thinking.

Tracking spending to make smarter choices
If the exercise reveals a regular EUR5 coffee and snack adds up to a EUR1,200 annual spend, there might be choices to be made. Do you still want the daily indulgence or would you prefer to cut it and use the cash on an annual holiday? Or maybe you keep the coffee but compensate by bringing lunch from home. An Ask Ian article by ING’s Ian Bright suggests the issue is not the daily latte, but whether the coffee drinker has an awareness of their spending and saving habits – and has set some long term goals.

Tracking spending as a way to boost saving
If the results reveal you’re spending much more than you thought, the results can shock you into action. Australian academics found in 2007 that students who tracked their spending increased their savings rate for four months in a row. In the first month, the group saved 8% of their income. Four months later when the study ended, the amount was almost 40%.

Billionaire investor Warren Buffett agrees
Tracking spending makes a lot of sense – but not everyone does it. Our tendency to put things off (procrastination) and to stick with old habits (inertia) can be barriers to action. These three tips might help.

First, overcome inertia by embracing simplicity. Tracking spending doesn’t need to be a huge lifestyle change. Start by estimating how much you spend for a month – then record your expenditures for just one month. Second, people are busy and the time-cost of tracking spending can seem large. But reframe the few hours a month it takes to record expenses by thinking in terms of a potential annual return. That’s a good hourly rate. The tip is backed up by a 2007 study that found that paying people by the hour leads people to see their time as more financially valuable. Lastly, if this kind of active money management seems all too burdensome, it’s hard to beat advice commonly attributed to billionaire investor Warren Buffett: pay yourself first and get the financial basics right: “Don’t save after spending, spend after saving”.

Mark Egan

Behavioural science consultant