How to Reverse Engineer Calculating Your Expenses

When I started making a full-time income through rideshare driving, I realized that it only made sense to continue if I’m bringin in more than goes out each month. Therefore, I got into the habit of tracking where every dollar went. And become obsessed with ensuring that I was on the road enough to “hit weekly income targets.”

Little did I realize how much wasted effort went into scrutinizing every purchase; and much unnecessary self-pressure was applied, as I forwent opportunities to be leisurely on the weekends.  After learning about the principles of behavior economics, and finally getting my credit cards to zero balances, did I ease up on being the spending police.  Now only one thing matters to my financial picture (in regards to income vs. expenses), and that’s how much my net worth increases by each month.

Along these lines, I’ve begun tracking my net worth since the last quarter of last year.  You can’t know whether your in the positives, negatives, or what’s going on unless you actually do this step.  Many established financial bloggers recommend it, and I do too.  Figuring out the value of my assets, minus the value of the liabilities I own presents a snapshot of my financial picture.

I’m also tracking how much money is coming in each month, which is by far easier than tracking expenses.  Because I typically have an expense or two on most days of the month; however, am only getting paid once (or twice depending on side hustles performed)/week.  Therefore, the income is much easier to record.  And can provide a simple means of reverse engineering my expenses each month.

Similarly, if you haven’t figured out already what the magic formula is, there are many many personal finance tools and apps out there.  For example, check out Rockstar Finance’s finance-app directory here.  The multitude of tools available out there are endless, IF creating a better financial situation for yourself calls to you.  A lot people just wing it.  And judge their position based on gut-feeling.  Personally, I enjoy tracking the data every month (month mind you, not every freakin’ day); so with the help of one or two financial apps (I prefer personal capital and clarity money myself) simply tabulating the net worth monthly is enough for me.

And the best part is that I can quickly derive how much spending occurred thustly:  subtract the total net worth increase (or decrease) over last month from total monthly income.  Like this:

net worth increase – income = monthly expenses

For example, if my net worth increased by $1200 and my income was $3100 that month, my expenses were ~$1900.  It further helps to compare this figure to amounts recorded by the financial apps.  Because some of my net worth increase may have been the result of market gains and/or dividends paid.  Therefore, following this example, if for month x above Clarity Money said my expenses were $2100, and my income (from rideshare driving) was a known $3100, the difference of $200 (i.e., my net worth increased by $1200 not $1000) reported may be attributed to market gains/dividends paid.

Along these lines, if you’re Okay with manually inputting expenses on a daily basis, check out this cool article on how to create your own expense tracking “app.”  Which actually works!  I’ve just finished creating one on my phone, and am pretty stoked to start tracking my expenses manually again.  Plus, I’ll be using the help of “real” financial apps, as mentioned above, too.  And the best part is, each transaction gets filed away into a Schedule C category (with the homemade-app).  So I can literally just print out the corresponding excel spreadsheet, and hand it to my tax professional.

When it comes to budgeting, saving money, and trying to get ahead, knowing your expenses are a crucial part of the game.  I’ve been experimenting with several different methodologies of expense tracking, and feel that the simplest is often the best.  There are some great services out there that will automatically budget your income for you, and show you how long you’ve been holding onto the money in your accounts.  Those are great; however, as long as my net worth grows each and every month (or the large majority of months), and I’m prepared for tax-time when it comes around, I’m totally fine with using a dynamic spreadsheet that I can add to anyplace and anytime.

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