Problems with Expenses

September 26th, 2011

The first step in assembling a financial model for a client is to collect all of the data about their finances i.e. their assets, liabilities, income and expenses.

In general people are quite knowledgeable about their assets. They know what houses in the neighbourhood are selling for. Similarly, the outstanding balances of mortgages and their income are easy to get. Very often expenses are a problem. The majority of people have only a rough idea of how much they spend. It is not unusual to be told that the client doesn’t know where their money goes.

There are ways to get around this gap because, in most cases, after income taxes, mortgage payments, RRSP contributions and home utilities, all of the rest of the income is spent. If the model shows significant positive net cash flows, we set up a ‘hobby’ and assign a cost that sops up the excess.

This approach works as long as people are earning a salary. We now have clients approaching retirement who are considering how to convert their savings into a stream of income. When we ask them to quantify their essential and discretionary expenses, we often get blank stares.

In the past, we have asked people to gather all their bank and credit card statements. We would then go through the laborious process of moving all of the numbers into an EXCEL spreadsheet. This was an interesting process because almost every time, people would look at the results and say “I had not idea I was spending that much on _________.” The problem is that this process is time consuming and tedious, and we have more productive ways to help our clients.

My wife has been using Quicken to track our expenses since 2003. She downloads all the transactions from our bank and credit card company. We estimate that it takes about 2 hours a month.

Occasionally it is a bit of a hassle, particularly when a credit or access card number changes. There is no question, however, that we have a very tight control on our spending.

I was explaining this process to a client recently and she asked how to get started. I suggested that she get a copy of Quicken 2011 For Dummies and download the software from the Intuit siteĀ To my delight, I got a note from her saying that she had started. I have offered to help her get set up and running. Over the next few months, I will keep you posted on how she is doing, the problems she runs into and the solutions we develop to keep moving forward.

William Jack