Personal Finance Data and Meaningful Decisions

A few months ago, I read a great article by Bill Barnwell of entitled Bridging the Analytics Gap.

First, some background. Over the past fifteen years or so, there’s been a huge shift in how sports are analyzed. The amount of data collected on sporting events has grown exponentially and professional sports teams have found ways to put this to good use through statistical analysis. You’re probably familiar with this if you saw the great film Moneyball, starring Brad Pitt, which is based on the book of the same name.

Barnwell’s point is that with all of these tools and statistics available for analyzing sports, the real challenge is communicating it and finding ways to translate it into meaningful action.

This phenomenon isn’t just true in sports. “Big data” has become a part of almost every field. From genetics where billions of pieces of data are generated on a daily basis to medicine where countless medical records are just being integrated for the first time, we have more access to data than ever before.

This is also true for individuals. Just sitting here at my computer, I can call up tons of information about myself: bank statements dating back years and years, countless bills, detailed information about my electrical usage, and so on. If I dig through my files, I can find much more than that.

It’s a flood of data.

Even something as simple as a transaction log – a list of every time you spend or receive money – that you might build with a budgeting program will often have dozens of entries over the course of a month. If you break some of those down further – like splitting up a grocery receipt into individual items – those dozens can quickly become hundreds.

It becomes so overwhelming, in fact, that most people just kind of ignore it in a way – and, frankly, I can’t blame them. No matter what you’re doing, making sense of a lot of pieces of data is hard.

I write about personal finance on a daily basis and I keep an extremely careful eye on my own money and even I can’t deal with all of it. Taking all of my personal finance data and breaking it down into meaningful statements is very challenging and something I can only do at a superficial level.

That doesn’t mean I haven’t tried.

Along the way, I have found a few things that are really useful in terms of turning all of that information into something that’s actually useful, something I can take action on immediately. Here are three examples.

50/30/20 Budgeting

All Your WorthOne popular form of budgeting is known as 50/30/20 budgeting. I was first introduced to it by the wonderful book All Your Worth by Elizabeth Warren and Amelia Warren Tyagi.

The 50/30/20 philosophy is as follows. To achieve an enjoyable life now and a good life later, you should spend 50% of your total income on necessities – taxes, housing, food basics, electricity, basic clothing, and so on. 30% of your money should go toward enjoyment – cable television, going out to eat, hobby and entertainment purchases, and so on. 20% should go into some form of savings – debt repayment, retirement, and so on.

This is actually a pretty good structure for most people. People who are dealing with a low income will probably have more than 50% of their income spent toward needs, while people with a high income will probably be well under 50%. Also, people who aren’t planning for the future well often sneak over 30% on their enjoyment spending, while people who are really frugal come in well under 30%.

So, what does this do with number crunching? If you’re keeping track of your transactions – meaning you have your recent pay stubs and credit card and bank statements and you hang on to your grocery receipts – you can easily tag each line on those statements as falling into one of those three areas. Is it a need, an enjoyment, or savings? (Sometimes it can be hard to categorize which is which – you’ll have to make your own call.)

I usually do this with three different colors of highlighter – you might use blue for needs, pink for enjoyments, and orange for savings.

When you’re done, go through and add up each category. Then, add up the total of all three categories to get your total spending. Divide the total by each category to get the percentage spent.

Is it something close to 50/30/20? You’re probably doing well. The further it is away from any of those numbers, the more likely it is that you need to take some kind of action in your life.

You can probably figure out some pretty good conclusions for yourself if you’re not meeting the threshold in each area. For example, if you’re over 50% on needs, it is important that you find more avenues of income. That should be your financial focus for a while. Can you find another job or build a side business of some kind? If you’re over 30% on enjoyment spending, it is important that you cut back a bit on your pleasures. Which of your pleasurable expenses leave you wondering why you spent that money? Those are things you can cut back on.

That’s just one example of how to turn a lot of information into simple, meaningful action. Here’s another.

Grocery Receipt Processing

Just like everyone else, I tend to be sucked in by impulsive buying. Not only will I sometimes buy something at the grocery store that looks delicious that isn’t on my list, I’ll also convince myself to “upgrade” an item to a more expensive version.

Life isn’t fun without a few treats, but it’s really easy to let that go overboard. What I usually do is adopt a threshold for “frivolous” spending on a grocery trip. For me, I try to make sure that on a given trip 75% of my money is spent on my actual needs from my grocery list, while 25% is spent on less essential items. You can adjust this accordingly.

(For those unfamiliar, we use a meal planning strategy that generates a meal plan and a grocery list for us so that we know what we’re shopping for.)

After a shopping trip, I’ll hang onto a copy of my shopping list and the receipt for a few days, then I’ll evaluate it. I’ll use three highlighters, just like before. If an item is straight from my grocery list and I’m sure I bought a cheap version of it, I’ll mark it in blue. If an item is from my list, but I think I bought a more expensive version than necessary, I’ll mark it in pink. If an item is not on my list at all, I mark it in orage.

For those blue items, I try to figure out what the cost of the basic version is and I note it on the receipt, along with the difference in prices. So, if I spent $3.99 on an item that I could have purchased for $2.99, I’ll mark it as $2.99 + $1.00 on the side. (Often, it’s hard to figure this out, so I’ll just use my best estimate and move on without spending much time on each item.)

After that, I add up all of the unnecessary items – the “orange” items plus the added value of the “pink” items. I’ll then divide the subtotal by that number.

If that result is higher than 0.25 – meaning I spent more than 25% on impulsive things, meaning I also spent less than 75% of my money on actual food needs – then I know I made a lot of bad choices. If I see that result, I pledge to buy nothing extra on the next grocery trip. If it’s under 0.25, I treat the next trip as a normal one.

I turn all of the information on that grocery receipt into a simple guide for my next trip. It takes perhaps ten minutes to do – about five minutes to mark the receipt, two or three minutes to figure out the upgrades, and two minutes to add – but it gives me real guidance as to my food-buying habits. I want to allow myself some freedom to buy extra items at the store, but I don’t want it to get out of hand. I let the data produce a clear, easy-to-follow rule for me.

Here’s another example of how I turn lots of personal finance data into a simple rule to follow.

Good Food, Cheap Food

My family likes to try out new recipes all the time. One week, we’ll try out a Moorish-style chickpea and spinach stew, then a week later we’ll try out things like Chilean dal and potato-peanut curry.

The recipes we keep are the ones that are not only inexpensive but are also big hits with the family. The problem is that the actual preparation of our meals is usually several days separated from the purchase of the food, so it takes some work to figure it all out.

What I do is pretty simple – I save our grocery store receipts. If a meal turns out to be a hit for our family, I go back and look at how cheap that recipe was by simply looking up the prices of everything for that recipe on the grocery receipt. If the price is $1.50 per person per meal, we save the recipe in our “go-to recipe” collection.

Over the years, our “go-to recipe” collection has grown to the hundreds, usually based on recipes found on websites or cookbooks with our own modifications. We know that the recipes in there are cheap and that our family likes them, so they form the backbone of what our family eats.

These recipes are actually stored in Paprika, so this program takes an active role in our meal planning (pretty much any recipe program will work for this). Whenever I see an ingredient on sale in the grocery store flyer, the first place I search is Paprika to see if I have a recipe that uses that ingredient. If there’s one in there, I can completely trust that it’s cheap and it’s liked by our family – or else it wouldn’t be in there. Usually, that recipe added to our meal plan for the week so that we’re using an on-sale ingredient as a major part of at least one recipe.

A bit of number crunching and filtering of our grocery store receipts turns into a valuable tool for meal planning, making it easy to translate a grocery store flyer into a set of cheap meals our family likes.

Final Thoughts

Piles of grocery receipts, bank statements, energy bills, and other documents can be overwhelming in the amount of data they provide for you, but if you approach that data with a meaningful question that directly leads to a plan of action for you, it can be really useful.

The key, for me, is to figure out the plan of action before I even start digging in. I try to approach everything I do with my personal finance data with a simple statement:

If this is true, then that is what I will do; if it’s not true, then I will do this other thing instead.

If my pleasurable spending is above 30%, then I will remove some of my less-important pleasures; otherwise I’ll feel proud that my spending is in balance.

If my non-essential grocery spending is over 25% of my total bill, then I will avoid all non-essentials during my next grocery store visit; otherwise I’ll feel good and proceed as normal.

If my family likes this recipe and the ingredients cost less than $1.50 a head, then I’ll add it to my recipe collection; otherwise I’ll toss that recipe and not use it at a later date.

A statement like that not only asks a very specific question about your information, but it also gives you a plan of action to follow based on what you discover. That way, you can dig in to find the true answer and the data will tell you the right way to go.

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