Cash Flow Trackers: How to Make Them Work for You

March 23, 2017 Financial Planning By: Yeske Buie

How much did you spend at the grocery store last week? What about at restaurants last month? Or on clothes this year? You probably have only a very general idea of the answers to these questions. And frankly, that’s ok. Life is often too busy to record and categorize every expense. Luckily, technology can help do all of that for you. But is such a granular analysis even worthwhile? Today, we take a look at one of the more popular cash flow tracking apps – Mint – and provide our take on the service and on using cash flow trackers.

Heightened Awareness

Most people are aware, in a general sense, of their cash flow situation. That is, they know if they are cash flow positive or negative. However, most do not know the composition of their expenses. A cash flow tracking app brings awareness to how we are spending our money.

Even if you are happy with your level of (hopefully) positive cash flow, it can be a valuable exercise to take a closer look at where exactly your money is going. A mere heightened awareness of how you are spending your dollars can often be enough to change your behavior. Furthermore, the idea that someone, even if that someone is really an app on your phone, can see your spending habits can further alter behavior. The Hawthorne effect, also known as the observation bias, states that people will change their behavior simply because they are being observed. This phenomenon is intuitively true; think of how much harder you exercise when an instructor is present versus when you are on your own. A cash flow tracker can serve to activate this psychological effect and help motivate us to improve our spending habits.

Categorization & Trend-Tracking

One of the most touted features of cash flow trackers is their ability to categorize your expenses. Mint has at least 17 categories with over 75 different descriptions, ranging from groceries to spas. In theory this feature sounds convenient, but it often proves complicated in practice. For example, if you use public transportation (such as BART) to get to work, how would you categorize such an expense? There is an auto and transport category, but no specific “public transportation” description. You could categorize it as “Gas & Fuel” and just remember why you place the expense there, but now your fully automated system is not so automatic. Plus, a non-trivial percentage of your transactions may be uncategorized, and it will be up to you to manually assign a category. Some may find the exercise helpful, as the process of manually assigning expenses to a category increase the salience of the expense. And for many, that salience is the best outcome of using a cash flow tracker. Regardless, we question the importance to categorize every expense. Instead, Mint, or other services, can help serve to identify general trends. By looking at spending over time, you can begin to understand patterns about your spending. Does your spending spike around the holidays? Do you splurge on big purchases right after payday? Setting custom date ranges can allow you to make those kind of observations. We argue that those observations and trends are more important than exactly how much you spent on dinner last Friday.

Security & Trust

One of the main concerns raised when someone mentions using an app like Mint.com is the security risk. People are generally wary (and for good reason) of handing over usernames and passwords for bank accounts. While the convenience of a cash flow tracking app sounds enticing, for many, the fear of identity theft outweighs that convenience. It is important to realize that, at least in the case of Mint.com, there is no ability to actually access your bank account and make transactions via the app (unless you use the Mint billing feature). To help protect your data, Mint stores your user name and passwords in separate encrypted databases. You can also enable two factor authentication, which we are big fans of. Finally, Mint also has some security clout behind them; the service is owned by Intuit, owners of QuickBooks and TurboTax. To read more about Intuit’s security features, visit their online security center.

We certainly do not mean to discount the importance of security. Even with extensive security features, there is inherent risk with sharing sensitive information that could be avoided simply by not sharing that info. In modern society, it is virtually impossible to function without sharing sensitive financial information with some third parties. As a reminder of what Yeske Buie does to protect your data, here’s a refresher, courtesy of a previous Digest Post. Additionally, we share some other previous posts to serve as reminders for good financial security habits.

Another question we have received regarding Mint is, what is in it for them? What does Mint get for offering this “free” service? Most people know that consumers of a free product are the actual product. Mint creates revenue through lead generation via targeted ads to credit cards and banks accounts, which create a referral fee for Mint every time a user follows a link and purchases that product. This means that they may share your information with other financial institutions. However, Mint does give you the ability to opt out of marketing with non-affiliates (non-Intuit products). For more information on Mint’s privacy policies, you can read their privacy statement here.

Using a cash flow tracker such as Mint is not for everyone. Some prefer to create their own budgeting tools in Excel, or would rather use rules of thumb in place of data tracking. Whatever way you approach your cash flow, Yeske Buie is excited to have a conversation about your methods.

Cash Flow Trackers: How to Make Them Work for You