The first step in the SEPP Journey is to understand your spending.
Early retirees necessarily need to be good with money and have significant savings. Building your savings means spending less than your income, and that’s not easy to do these days with Amazon available at the click of a mouse and Starbucks around every corner.
If you’re just starting out in your journey to early retirement, this article will help you measure your spending so you can adjust it and save more of your income.
The first step in the first blog article Top 15 Things TO DO When Planning Early Distributions, is to:
- Gain a thorough understanding of your spending and other income sources. Track spending for several months to two years (recommended) to get a reliable estimate. It’s best to estimate your spending and income throughout the time you will be taking your early distributions, and plan conservatively so you don’t underestimate expenses or overestimate income.
Understand your spending. In order to gain a thorough understanding of your spending, you need to gather all receipts from as far back as you have them and transfer them to a spreadsheet. Then you will organize your spending into groups. You can use the Expense Tracking Template under the Tools & Resources/Templates menu on 72tNET.com as a guide with suggestions on how to track and group your expenses.
Value for your spending. Then you’ll need to review each group and determine whether you’re receiving value for those purchases. Start with the generic Shopping category for easy reductions but eventually you also want to venture into lowering your mortgage and property taxes (I’ll describe these in a future blog article). This is not easy, and no one can do it for you, you have to control the outflows, so you can increase the inflows.
A better way. No one but you can stop you from spending money on things you don’t need, but there is a tool that will make it easier to track and group your expenses – and I think it’s the better way. I use a financial aggregator called Mint to track my spending. I can see what I’m spending and reduce spending on low value items. Mint helps me by electronically tracking spending on my credit cards and bank accounts as well as my home equity line of credit, car loans and mortgage. It automatically organizes my spending into buckets such as those you will find on the Expense Tracking Template.
Categorizing. Mint is great at guessing a category for each transaction but it’s not a mind reader, so if you go to a restaurant called The Book Company, it will likely classify the transaction as reading materials rather than an evening meal. If you often go to The Book Company for dinner, you can help Mint to properly classify all Book Company transactions as Restaurants with one click of a checkbox.
Time. The time it takes me to organize transactions in Mint depends on how many transactions there are. Now that my family’s spending is pretty efficient, I can check-in once a month for 5 minutes.
Power of Trends. For our purposes in this article, the most powerful feature of Mint is it’s Trends tab. Through Trends, you can chart your spending over time, through a particular merchant, or by category.
The Spending by Category graphic shows where you spent the most money during the time frame you selected. The picture to the left shows that our highest monthly bill is on “Home”. Home consists of our mortgage plus other house expenses including home improvements and furnishings, for example. I can add more categories if I choose, for example I added a Motorcycle category to track my husband’s motorcycle expenses separately from the car expenses.
There is also a graph showing your Spending over Time. The graph below shows spending by month. You can click on the green bars to show the individual charges for that month.
My favorite part of the Spending over Time screen is just below the green bars, which I call the Most Spent section. This section shows the most spent during the time frame you selected, as well as least spent, greatest change and average spending. Once you have a few years of data stored in Mint, this section becomes very powerful. You can set the time frame for All Time and see how your average spending is increasing or decreasing over time. A year ago Mint replaced this section with an advertisement (ah!) and I wrote a desperate change request to put it back. It took a few months but they did put the Most Spent section back (and moved the ad down, just in case you were curious).
Mint also has the ability to group Spending by Merchant and Spending by Tag with results similar to the pie graph above. You can tag any expense for any purpose. I use Tags to indicate tax deductible expenses, such as medical or business expenses, to make them easier to find at tax time.
I hope this overview of Mint’s Spending features has convinced you of the power of Mint to help you get a good grasp of your expenses in preparation for developing your SEPP plan. Using Mint is easy once it’s set up. If you would like help setting up Mint to track your expenses, send an email request to [email protected].
Coming up in the next blog article, Net Worth is another powerful feature of Mint and is the secret to keeping you motivated to save.
Note: I’ve been a Mint user since 2011 and really do use it and love it. I received no income from Mint for this review.