Beat Last Year.

How hacking away at the unessential reveals the path to financial independence.

By Brad Beckstrom

I thought I’d always been good with money, but in 2008, things were starting to hit the shitter. Stock market declines were on their way to a 40% drop. Real estate was headed in the same direction. I was running a small business and weaving my way through the craziness.

Just like I learned in 2000, there’s not much you can do about paper losses. In fact, the more investment moves you make during a correction or bear market, the more damage you can do. It’s far better to be prepared and have a strategy, before a bear market, helping you avoid bad decisions.

Why am I talking about 2000 and 2008 in 2018? Well, we know that recessions and bear markets come along with some regularity. Now is the best time to make sure you’re prepared for the next market decline. The good news is there are only a few very important steps in this process.

1. Track every dollar that comes into and goes out of your life.
2. Give yourself a pay cut and invest the difference every month.
3. Build up a 1 year emergency fund that allows you to ride out the storm, and avoid selling off investments. 

I was fortunate enough to stumble across the book “Your Money or Your Life” around 1993. After reading it a couple times, I had a deep understanding of the importance of tracking my expenses and investments with the end goal of financial independence. A few years later, I upgraded my computer and received a demo copy of Quicken. The difference between Quicken and some other home budgeting applications at the time was the availability of downloads from both my bank and my brokerage. This was a game changer for me. I’d been far too lazy to enter transactions in the past and absolutely hated reconciling my checking account.

Now I was able to automatically download and categorize transactions and review my spending by category for any time period. My roommates at the time wondered what I was doing with that screeching modem and all the printouts.

Years later, lots of web and mobile app based alternatives would come along allowing you to automatically track transactions online like Mint.com and Personal Capital. These are great for tracking investment performance, and even occasionally spotting credit card fraud, but I’ve found that downloading transactions once a month when my bank statement or credit card statement comes, then hitting that reconcile button, is an essential part of hacking away at expenses.

When you download the transactions into Quicken, you briefly review them to make sure they’ve been auto-categorized properly. That’s where you can spot things like spikes in your cable bill or other unidentified or regrettable charges. I found that this is the essential part of tracking your expenses. When everything’s just automatically appearing online, you’re not going through the quick review and reconciliation process. This may sound like an extra step but by doing this you can avoid having to create and manage a budget, because you’re creating one automatically with the steps below.

I also highly recommend setting up online bill pay through your bank using Quicken. There is no charge and you can quickly pay credit card bills and other random bills like medical or educational directly through Quicken. (Don’t use Quicken’s fee-based bill pay service, your bank should offer it for free) If your bank doesn’t offer bill pay through Quicken, pay your bills online then download them once per month with your statement. When you enter and pay bills they get added to your spending by category.

Since all of your spending is captured in Quicken, you can regularly compare your spending to the prior month, or the same month last year. We always compare our spending to the same month last year (so June 2017 vs June 2016)  because our spending, like many families, tends to spike seasonally. Summer travel, education expenses etc. I like to call this process “Beating Last Year”.

Beating Last Year

Just like those on the road to financial independence manage their investments and rebalance each year, it’s important to review your current spending versus the same period last year. We do this monthly to make sure we’re on track. The monthly report also has year-to-date totals.  You look at each category, Quicken has most of them built into preformatted reports, then see how you did versus the same period the previous year. There is a simple goal here: simply beat last year. I’ve been tracking expenses and Quicken since 1993 and watched them peak in 2005 then again in 2007. Now I’m proud to say we’ve been steadily reducing spending since 2008. We certainly don’t win every year, but the trend is in the right direction. For example, in 2013 our spending was lower than in 2005. That’s a significant accomplishment considering two kids in school and all the expenses related to raising them.

We have some solid comparisons. We’ve lived in the same house since 1998 and have watched things like mortgage principal and interest drop, but property taxes nearly triple during that time, based on property appreciation. These are just a few examples of expense categories you work on beating year in year out. When property taxes are going up with the value of your home, it may be a good time to look at refinancing your mortgage at a lower rate.

At the end of the year, I print out the final report then sort it by expense category. The top of last year’s report included things like college expenses for our older son, vacations, and my most frequent foe “grocery and household spending”.  After you do this for awhile, you get great at spotting spending and lifestyle creep. You can come up with ideas to cut spending in areas that are growing. We replaced most spendy supermarket and household purchases with planned purchases at Costco, Trader Joe’s, and Amazon. Auto expenses dropped as well as cars were paid off over the years. We go after the big expenses first, and continue to whittle away at them and each month work down the list and hack away at the unessential.

As a quick summary and how to. Here’s is what I do monthly, to beat last year:

1. I track all our financial accounts including, two credit cards, one bank account, one investment account, a mortgage, a 529 account, and an HSA in Quicken.
2. Whenever I receive a credit card statement bank statement etc. I chuck it in my inbox.
3. Once a week, I open Quicken and download any transactions, reconcile the statement, and pay the balance in full. This simple once a week action catches any random bank charges or fraudulent transactions and helps me automatically track spending.
4. I follow the same process with our bank and investment account, quickly reconciling and scanning for any unusual fees or transactions.
5. Once a month, usually around the 20th when all of the previous month statements have come and I’m caught up on credit card, bill pay transactions, gas and electric, internet etc. I run a saved report in Quicken comparing the previous month to the same period last year and include a year-to-date report with the same info.
6. I’ll quickly highlight any spending that spiked, and discuss it with the family, so we can hack away at rising expenses and………. Beat Last Year.

Beating last year by consistently hacking away at your largest expenses, then saving/investing the difference are crucial steps in building your emergency fund and saving towards financial independence.

Please share any tips, apps or programs you use to beat last year.

The Frug

Related reading

Your Money or Your Life Vicki Robin 

All Your Worth Liz Warren