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Do you know how much money you spend on a monthly basis? And we are not talking here about a rough estimate, but do you actually know how much money you spent on groceries, housing and shopping? Do you track your expenses?
How much money are you putting aside every month? Is it 1%, 10% or much higher? If you do not have a spreadsheet, an app or a booklet somewhere which shows you the exact number, then you are most likely spending money in places you are not aware of.
In this post, I will walk you through the process of how to set up a system to track you expenses and calculate your savings rate. At the same time, I will show you how to calculate your net worth which is key for understanding how far along the path to financial independence you are.
Let’s dig right in.
The Tools & Process
In general, not much is needed in terms of tools. A spreadsheet on your computer will do just fine.
Alternatively, if you do not have access to a computer, then any piece of paper (such as a small booklet) is enough as well.
Personally, I use a spreadsheet on my computer. Once per month I sit down and extract all my expenses on my credit card and my debit card from the online portal of my bank. Then, I go expense-by-expense and put them into expense categories (we will get into more details on what these categories are below).
This is a re-occurring process which costs me about 1 hour every month to do this process.
Some people prefer to track their expenses on-the-go through an app. This means every time you make a purchase (such as buying a coffee or paying rent), you manually open the app, enter the amount spent and input the category of this expense.
Below are some apps used for this purpose:
I tried this on-the-go approach for a while with the app “Money Control Spending Tracker” and was very satisfied with the ease of use and analytics of the program. The problem was that I would forget to input expenses and at the end of the month I would have to cross-check my debit and credit cards against the app in any case, just to make sure that I had not forgotten anything.
That is why I switched to the model of noting down my expenses at the end of each month.
If you use a lot of cash (like many people do in Switzerland), then just extracting your expense details from your online portal will not be sufficient, because you will have cash withdrawals which you will not be able to categorize by expense details.
If this is the case, then you have two options to go with:
- Use one of the above apps, solely for tracking your cash expenses.
- Keep all receipts of your cash expenses and categorize them at the end of the month.
With both of these ways you make sure to track all of your expenses and at the same time be able to categorize them accurately as well.
Next we will look at the individual categorize that should be in your spreadsheet, app or expense booklet.
The first thing you need to track in your file is your income. Now this income can be from your normal day-to-day job. In Switzerland, this will generally be a monthly pay-check received.
However, it can also be money you receive from side hustles and the odd-job done. For example, if you baby-sit in the evenings, drive Uber or do bar-tending on the weekends, then you would include the money received from these jobs as well.
I like to split my different income streams in my template to see how much of my income relates to my “normal” job and how much relates to outside jobs.
You need to track your expenses to understand how and when you can reach financial independence. There are many more categories than for income, where we just separate between “normal job” and other income.
I will walk you through each line. Please note that these are the categories that I use. However, you are free to split and choose the categories that are most relevant for you.
No-one likes them. No-one is happy to pay them. But they are one of the main reasons why we have such a great infrastructure, health care system and educational system in Switzerland.
Every resident in Switzerland has to pay them.
The problem with taxes is that you generally do not pay them every month, but once per year. That means for one specific month your savings rate will be very low, most likely even negative. On the other hand, the remaining eleven months are higher than they would be had you paid taxes every month.
Personally, I follow a cash-in and cash-out principle. This means I record only cash out-flows and cash in-flows when they occur. I will give you an example:
Let us assume that in 2019 I made a salary of CHF 75’000 and I need to pay 20% taxes.
In my expense tracker I do not record any taxes for the year 2019. When I pay my taxes in March 2020, that is when I record my full taxes in March 2020.
There are some disadvantages with this approach:
- I have a huge amount of expenses for March 2020, despite the costs actually being linked to all months of 2019.
- I am recording taxes of 2019 in the year of 2020.
I am fine with both disadvantages, because I will be paying taxes every year. This means in 2019, I paid taxes for 2018 and so forth. The impact on my savings rate should be very limited therefore.
This approach also allows me to avoid having to estimate my taxes. I prefer to avoid estimates and guessing when it comes to expenses. Actual figures are always what count in the end.
Deductions For Social Security
When you receive your pay-check every month, then your employer will have made some deductions for social security. These include your old-age and survivor’s insurance and your pension contributions for example.
How should you include these in your expense tracker?
I would classify the deductions into two categories:
- The deductions which are not put onto a separate account specifically for you, but are paid to the government to fund social security for the broader population (e.g. first pillar / old-age and survivor’s insurance, disability insurance).
- The deductions which are put aside for you specifically (e.g. second pillar / pension contributions).
The first type of deductions should count as expenses. Why? Because this money is not specifically for you, but falls into a broader pool to guarantee the social security system in Switzerland.
The second types of deductions I do not count as expenses, because they are specific to you. For the second pillar, your pension fund will keep a tab on your contributions. Your pay-out will depend on how much money you contributed.
In addition, you have access to these funds before 65 in case you want to buy real estate (taxes will apply then). Therefore, these deductions do not represent expenses, but postponed income.
Nevertheless, make sure to track how much you put aside for the second pillar. In the end, it is part of your net worth.
All deduction should be clearly shown on your pay slip. If something is not clear, then ask your manager or Human Resources contact for more details.
Housing is one of the biggest expenses you have on a monthly basis. In 2017, Swiss people spent on average 17% of their income on housing.
If you are renting, then your monthly rent would fall within this category. For people with a mortgage, the interest payments would be recorded.
This category includes any costs related to your car, to using public transport or to using transport services such as taxis or ridesharing.
Everyone needs to eat. Your body needs fuel and food give you that fuel.
In Switzerland, households spend on average 6.4% (or CHF 636) per month on groceries. This includes food, beverages and other nutritional products.
Many people split their food consumption even further into categories such as:
- Non-alcoholic beverages
- Alcoholic beverages
This makes especially sense when you have high costs in this category and want to analyse ways to reduce them.
An apartment or house needs cleaning and maintenance. Any items which are used to keep your housing facility in shape, should be recorded in this category.
It is important to take care of one-self. Any costs related to shower utensils, make-up, etc. should be recorded under this category.
Clothes / Fashion
Walking around naked is not an option nowadays. Everyone needs clothes and they can represent quite a hefty expense line, especially when you are trying to get the newest of all things.
When I started tracking my expenses, I did not have a specific categories for gifts. However, after categorizing my expenses for Christmas for the first time, I realized that this is a significant part of my cash-outflows. For me it was definitely worth tracking separately.
I include any costs which related to entertaining myself in this category. This includes:
- Tickets for concerts
- Tickets for the cinema
- Subscription services (Netflix, DisneyPlus)
- Theme Parks
I love to travel. I love experiencing new cultures, trying new food, meeting new people.
But travelling is expensive. Anything related to my holidays falls in this category.
Personally, I further split it into:
There are many costs in Switzerland which are healthcare related. My main buckets are:
- Medical Insurance: Basic
- Medical Insurance: Supplementary
- Medical Bills
In this category, you would record any expenses related to debt. For example:
- Expenses due to late payments on invoices
- Credit card fees
- Interest on loans taken
Any costs which you cannot put into one of the other categories, falls within this heading. Once per year, I take the time to analyse these costs, just to determine whether I need to create a new category going forward.
Savings Rate Calculation
Now that we have determined how to calculate your income and your expenses, let us calculate your savings rate.
In principle, the idea is simple:
- Calculate your savings: Income – Expenses = Savings
- Calculate your savings rate: Savings / Income = Savings Rate
It seems simple, but many people have different views on what to include in your expenses. Some people exclude taxes for example, because they say that they cannot change these.
My approach is simple:
Income = cash in-flow
Expenses = cash out-flow
In the end, you want to know how good you are at saving money. It does not matter whether you can or cannot influence the expense. It is still an expense.
As mentioned above, the only exception I make is for the pension contributions (second pillar), because these remain on a specific account for my person. Therefore, I consider it like a savings account which I will only have access to in the future.
My savings rate calculation therefore is:
+ Normal Income
+ Side Income
= Total Income
– Deductions for Social Security (excl. Second Pillar)
– Household Items
– Clothes / Fashion
– Medical Costs
– Interest Payments
– Other Expenses
= Total Expenses
Savings = Total Income – Total Expenses
Savings Rate = Savings / Total Income
If you have a negative savings rate, then you are spending more than you are earning. If it is positive, then you are putting money aside.
The last part in the whole puzzle is the topic of calculating your net worth.
Again, the concept sounds simple: Net Worth = Assets – Liabilities.
Assets are everything you own. This includes:
- All money on savings accounts
- All investments (such as shares, bonds, ETFs)
- Real Estate
- Pension Fund
Liabilities include everything which you owe, for example:
- Other Debt
Unfortunately, there are different ways to calculate your net worth, especially when it comes to real estate and pension benefits:
- For real estate, some people include the value at which they bought the apartment / house. Others use the current market value of the house. This is completely up to you. Just make sure to have a reliable estimate when you use current market value.
- Pension benefits are locked up until you are 65, respectively when you take it out earlier, then you pay a hefty tax on it. Therefore, some people include and some people exclude pension benefits from their net worth.
As I currently do not own any real estate, I do not have the first problem. For the second, I always calculate my net worth first without the pension benefits and then with:
Net Worth 1
+ Money on Savings Accounts
+ Money invested
+ Real estate
= Total Assets
– Other Debt
= Total Liabilities
Net Worth 1 = Total Assets – Total Liabilities
Net Worth 2
+ Money on Savings Accounts
+ Money invested
+ Real estate
+ Second Pillar
+ Third Pillar
= Total Assets (incl. Pension)
– Other Debt
= Total Liabilities
Net Worth 2 = Total Assets (incl. Pension) – Total Liabilities
In the end, the most important thing to consider when you track your expenses and calculating your savings rate & net worth is consistency. Make sure to do it at least every month and make sure you do it the same way every single time.
Only with this consistency are you able to accurately track the evolution of your finances and implement strategies to improve.
I hope this post has given you a better understanding of how to track your expenses. Feel free to send me an e-mail at email@example.com and I will be happy to send you the template I use to track my expenses.
- Create template to track your expenses and define your categories (or download free template)
- Input expenses of the last 1 – 3 months
- Calculate your net worth
What was your highest expense category? Which categories surprised you the most in terms of your spending? Which category do you aim to improve in the future?
Let me know in the comments or send me an e-mail at firstname.lastname@example.org. Any questions, concerns, feedback and constructive criticism is highly appreciated.