Know thyself: keeping track of your finances
tl;dr • Knowing where you are at is key to getting where you would like to be • Track daily expenses to identify what can be cut • Keep snapshots of your balance sheet to observe your progress
No matter where you would like to get to, every journey begins at the place where you are. Consequently, if prosperity is your desired destination, precisely knowing the current state of your finances is key. I hope some of the ideas in this post will inspire you to get better at keeping track of your hard earned wealth, thus helping you with taking your prosperity to the next level.
What to track?
There are two main methods I use to track of my finances: micro-tracking – recording each and every transaction – and big picture tracking – maintaining snapshots of a balance sheet.
Micro-tracking means you'll be recording each and every penny that enters or leaves your wallet or bank accounts. What I find most valuable about this method is how much it helps one understand where their money is being spent, and where there are opportunities for cutting unnecessary expenses.
The drawback is that it can quickly become tedious, so I’ve never used it for more than a couple of months in which I thought I really needed it. I'd suggest you try and see if this is something that helps, but I wouldn't stick with it in the long run.
What I call big picture tracking, on the other hand, simply means keeping track of a few key numbers month over month, while at the same time being a bit more relaxed about keeping track of transactions. I found that tracking the state of my assets, liabilities and net worth through time has been of tremendous value for me to become more organized and steer my finances in the direction I want them to go.
With time, I also found value in tracking specific transactions like income, investing activities and charitable donations. These give me great visibility of the percentage of my income that is being invested, donated or actually spent, how much is being allocated to short-, mid-, or long-term investments, as well as what kind of charities I've been donating to.
Big picture tracking, a balance sheet plus key transactions, is my best recommendation for the long run.
How to track?
Both micro-tracking and big picture tracking can be done with a simple pen + notebook, a text document, a spreadsheet, or one of the many sophisticated phone apps available specifically for these purposes.
Here are my best recommendations on what to use specially for big picture tracking.
Balance Sheet Spreadsheet
The most basic way to track your finances – and still one of my favorites – is by creating a spreadsheet on LibreOffice Calc (or the spreadsheet software of your choice) representing your balance sheet.
The concept is simple: keep a list of your assets on the left side (e.g. bank accounts, investment accounts, real estate) and a list of your liabilities on the right side (e.g. mortgage, payables, credit cards).
Your equity – or net worth – is the sum total of your assets minus the sum total of your liabilities. E.g.:
At the end of each month, make a copy of the contents of the current month's balance sheet to a blank spreadsheet in the same document, gradually building a valuable record of the state of your finances month over month.
This was my main tracking tool for many years.
Apps
There are lots of apps that can help you with tracking your finances. Two that I have used and believe have most of the resources I value are Mint and Personal Capital. Both automatically integrate with multiple financial institutions and keep track of balances, earnings, net worth and more, making it almost effortless to record most of the things that matter.
I personally use Personal Capital as a secondary tracking tool.
Sztoks
After more than a decade of monthly tracking my assets, liabilities, and more using LibreOffice Calc, my spreadsheet had grown a lot in complexity and was becoming quite challenging to maintain. So I decided to leverage my software engineering skills to develop my own tailor-made spreadsheet-like app for tracking my finances.
The app makes it very easy to track balances of assets and liabilities, income, investing activities and charitable donations, it has support for multiple currencies, and makes the creation of next month's snapshot as simple as clicking a button.
The result of this experiment is Sztoks, a web app currently available as a functional prototype at sztoks.com, feel free to give it a try. The source code is available on GitHub for those who want to inspect it, modify it, contribute to the project, or run it on their own server.
This is currently my main tracking tool.
Bottom line
Find a tool that works for you to keep track of your finances and stick to it. This will be of tremendous help for building wealth more consistently. Your future self will be grateful!
Disclaimer
I may receive compensation when you click on links that I share.
This is not financial advice. I am not a certified financial planner or advisor, just an ordinary guy trying to sort out his own finances, sharing his perspective with no guarantees. Use the information provided at your own discretion. You are highly encouraged to do your own research before making any personal finance decision.