But:
1) Once you've automated most the of the steps, it takes, say, 1h per month to have everything up to date, so basically nothing.
2) Compared to no tracking, you can often end up finding money another party owes you. At that point, the 1h per month is financially worth it.
3) How little can you spend if times are tough? Any theoretical budget will pale in comparison with actual tracking of past expenses. Once you know this, you know how many months of spending you have in cash, meaning you can invest the rest in the long-term.
4) How much will you spend in 5 / 10 / 20 years? Why? You can better estimate this with accounting.
5) Let's say you spend $x on hobby A and $y on activity B. Does that reflect how much you like A and B? If not, maybe change it?
*: still... how diminished is your salary if you start a job that requires that you wear a suit everyday? Is it still better than the other offer you rejected? Maybe you made a mistake? This is way
It's also a single source of truth for your entire financial existence. You can use it to track your asset allocation. Which some people in the bracket you describe care a lot about.
Of course, you can pay people to do all of this stuff for you. (Accountant, Investment Broker, etc). But there are well-documented costs to these solutions. Basically, you have to trust them a lot, and if you don't speak their language you can't verify their choices.
Edit: to be clear, I'm not saying that maintaining a ledger is the right choice for everyone. It's a trade-off, like anything else, I just wanted to explicitly observe the variables that were at play in my decision. YMMV
that was it for me! i started using hledger because of:
- tracking irregular payments from a bunch of sources, often outstanding for a while
- tracking how much somebody owes me / i owe them
- being pretty much cash-only for a long while (long story). with cash, if you don't track the expenses manually, you wake up at the end of the month with a whole bunch of money gone and no idea what happened to it
- not knowing how much money i actually have available because it's spread across my wallet / bank account / paypal / piggy bank
hledger really helped me not go crazy with all of this!
PS. another unexpected benefit - tracking expenses can also help with ambient worries like "ugh i spend too much on takeout food". like, if you track it, at the end of the month you can look at how much you spent on it and conclude that it's actually reasonable (within your budget) and stop feeling guilty about it!
Inspired by your example, here's our rolling monthly sums of food expenses, COVID marked [1].
You can see where we moved (temporarily) to a place with lower food costs, and stopped eating out.
But there's also a dip around the holidays, because we spend a lot of that time with family and our food expenses go down proportionally. That dip happens to be consistent YoY, but we don't realize it because we have other things on our mind.
It's just great fun to have this stuff at your fingerprints.
It’s kind of tricky. I have an AWK script that reads a ledger report to compute the X and Y-value pairs. These are written to a temp file that is read by GNUPlot.
It’s a bit of work to get setup, but I’m able to copy paste the idea around my reports.
I’ve also found the GNUPlot manual to be very easy to read!
I’m away from my laptop now, but I’ll add a gist tomorrow.
It probably would have been better done in python (I probably wouldn't have needed the zero-inserting hack), but it works pretty well.
1. Accurate visualization. As you suggest, a great number of people pay most attention to their checking account balance. Making student loan payments on time can feel like just paying 'bills'. But it's actually a split between interest and principal, and in a sense, you are accumulating wealth by paying down principal in a way that just looking at the debit card balance will not. Similarly, racking up CC debt can feel cheap when making minimum payments.
2. Improved forecasting. Before GNUCash I largely worked the same way as you describe. Keeping a mental tally of bills outstanding and checking my balance via the automated phone system to judge what I can spend. Now I have scheduled transactions for those bills recorded 90d in advance, and can see at a glance my Minimum Future Balance. It's nearly the same thing, but with way less acid reflux from stress. And I can schedule in all the random annual expenses -- vehicle registration, vacations (when permitted), annual subscriptions -- just once and the system remembers for me. Plus I have a more granular archive of expenses to estimate and budget around.
3. Expense Analysis. Most people track one asset: checking acct, and maybe liabilities. Double entry accounting makes it feasible to transition from that to treating expenses and income as equally important. Probably the canonical example is car insurance; most insurers offer a six month premium, or a monthly payment with a surcharge. If you focus on checking acct balance, you go for the monthly payment with smaller upfront. If you want to reduce your annual expense you pick the six month option, dipping into savings briefly if required. On the income side, you'd be surprised how many people don't even bother to get the employer 401k match, even though you can often carry a CC balance (a very worst case scenario) and come out ahead.
4. (advanced) Portfolio balancing. If you're fortunate enough to fund a retirement plan, tracking your portfolio and asset allocation can be tricky across Roth IRA, 401k, etc. An annual rebalancing, formalizing the 'sell high, buy low' formula, is equally tricky when none of your accounts synchronize. A double entry system makes this and other retirement planning steps feasible.
1. There are people who like to create complex analysis/structure around their lives. I don't say they are unnecessarily complicating their lives, because that's part of their personality. So, yes, you are correct. An double-entry ledger doesn't add much insights.
2. After $200k/year income and $1m+ wealth, and if your wealth is very diversified (inherently complex), then I can see the value in it. ie: An engineer with $200k has less complexity than a freelance with $200k/year. At a certain point the freelance will benefit from an accountant, but maybe he's running some stuff in the dark economy or something.
Doing detailed accounting helps prevent you from that "go into debt" scenario.
Typical long term things people forget to save for:
- Their next car
- Car Repairs
- House repairs
- New roof for house
Etc.
With detailed accounting, you can set money aside for these things, and then when you suddenly decide to go on a vacation, you know how much money you need to leave aside in your savings to cover the above.
Now, I also have a small LLC. And I used to track my business income/expenses. It's useful, but also, I don't have that much volume to really care about ledger it's just too much work right now. Last year I did taxes with ledger, it was PITA to import everything. This year I just dumped my transactions into google sheets and setup pivot table, which accomplished exactly what I needed for tax return.
If you don't have enough, reduce your expenses, not your savings.
[0] https://www.investopedia.com/terms/p/payyourselffirst.asp
[1] https://www.daveramsey.com/blog/envelope-system-explained
My approach:
1. Put a reasonable amount in savings first, but make sure to leave yourself enough to enjoy life, because you can't be completely sure you'll be alive in 1, 5, 10 or 20 years.
2. Spent on monthly expenses without stressing about savings, because some fun money is also part of your budget.
3. If there's any money left over when you get your next paycheck, send that into savings as well.
If buying a PS5 is really important to you, then by setting money aside for it you are paying yourself first. For most working people, though, there are much more important things to save for, and the wiser decision would be not to buy the PS5 if it means reducing the savings.
If you instead allocate first, and operate the month assuming you never add had access to the funds, then it becomes painfully obvious that you've spent beyond the target -- and can make the decision then whether that's fine, and pull out the money from the savings buffer as needed (and presumably up the savings envelope for next month).
The main thing, I think, is that most people (not living hand-to-mouth) spend to their financial comfort -- not their physical comfort -- growing concerned mainly as they approach their upper limits, and then reduce accordingly. I'm thinking of Braess's paradox; you spend to the money you have, even if you'd be happy & fine with less.
So by reducing the total funds up front, you reduce spending earlier accordingly. Of course, no more so than what would make your lifestyle uncomfortable.
Also a mental bias against spending is not necessarily a good thing. Spending is like eating, unless you have a problem where you're doing it too much of it, doing less of it is not inherently desirable. I spent way less last year than 2019 because of Covid and my life certainly wasn't any better for it.
Which is significantly better than the other way around, because you’ve met your saving target(s). Really, that money constitutes legitimate excess cash. You can shove it into risky investments, or spend it freely; it doesn’t matter — you’ve met your needs.
> Also a mental bias against spending is not necessarily a good thing. Spending is like eating, unless you have a problem where you're doing it too much of it, doing less of it is not inherently desirable
If you’re spending over your saving targets, you are spending too much. If you’re spending under your targets, you’re free to spend more, guilt-free (you’ve covered your necessities, you’re playing with excess).
The only problem is if you set your savings budget so high that you can’t spend to your actual comfort (given your lifestyle). Then it becomes a question of accepting you simply don’t have so much money, and either reduce your lifestyle or extend your saving targets accordingly.
TLDR; meet your targets. Beyond that, do as you wish.
What's there to track, how much you've spent on potatoes and underwear this month versus the previous?
That was the scenario for a disciplined citizen. Most just pay the bills (not necessary all of them) and then just spend what's left on their debit card until there's nothing left. It usually happens before the next salary, of course. No accounting software would help there.
UPD: I'm not sure it was the right place to spill my negativity, I fully understand the benefits of being organized with your finances.