***This post may contain affiliate links. I do not recommend products that I have not personally vetted and love myself.***
Having recently finished the awesome money book, Your Money or Your Life, I am once again reinvigorated to track my finances and you should be too!
Tracking your finances is the number one way to bring about financial awareness and as they put it in the book financial intelligence. The simple act of tracking will make you more aware of your purchases and as a byproduct of that, reduce your spending.
When you become financially intelligent, your spending goes down, your income goes up, and your net worth goes up. All of your money problems are solved when you are financially intelligent.
Your problems may not be solved overnight, but a commitment to becoming financially intelligent will lead you out of debt and all the way to financial success.
Here are the steps that we all need to take in order to become financially intelligent:
1. Track everything down to the penny
Track everything down to the penny?! That is outrageous!
You’re right, it is outrageous. BUT, if you do this you will know where your money goes and knowledge is power. There are also tools to help you on your journey.
Personal Capital is an excellent and free tool to track your income and expenses. It will track it all down to the penny for you, so long as you use electronic forms of payment for everything. If you are spending cash then you will have to input those manually. But that is much easier than doing everything manually.
However, if you want to get the most out of tracking your finances, you will do it manually. You can input every purchase using good old-fashioned pencil and paper or you can use any of a myriad of financial tracking software.
Personally, I use GnuCash to track all of my finances. GnuCash is based on the principle of double-entry accounting where every transaction has a from and destination account that balance. All income and expense “categories” are actually “accounts”. I have been using Gnucash now for 3.5 years, but have a total of 5.5 years of data in it.
Related Post: Best Money Tracking Apps
I go through times of not wanting to input data into it because it is manual, but in the end, always do. Through my times of doubt, I continue. In the end, I am always glad that I did and reading Your Money or Your Life reaffirmed my commitment to manual data entry for finances.
By simply tracking your finances, you will become more aware of where your money goes to. Having to write down every expense is all the motivation you will need not to buy the newest widget that goes in the drawer never to be used. Our lives are already full of too many widgets. What is another one anyway?
Tracking your expenses helps raise your financial awareness and sets you on a path to saving more.
You will likely run into problems with manual data entry, especially while paying cash for things. Mrs. Atypical originally was not onboard with tracking down to the penny. Why does it matter, right?
Well, it matters because if you start to skip the small things here and there it can add up over the course of a year. The small $1 purchase every day, if not recorded is a silent $365 missing in the year. It’s not much on a daily tabulation, but over the course of the year it adds up to significant money spent. It truly adds up when you think about the number of hours you put in to make that money.
Mrs. Atypical took more than a year to come on board with telling me the cost of buying vegetables, eggs, and fruit at the local market along with other random purchases. It is all well and good when you have a receipt, but when you have to remember, it is more difficult. Just write it down, or remember until you get home and write it down. Everyone seemingly has a smartphone now. Jot it down in there. It is easy and takes no time at all.
Tracking down to the penny takes commitment, but if you are committed to making a better life for yourself, then you will track your finances. You can round off to the whole dollar if that is what it takes to get you to track your finances. Whatever it takes this is the first step to financial intelligence that leads to financial independence.
All the tracking begins to make sense when you start analyzing your results.
2. Monthly Tabulation
Now that you have decided that tracking all your income and expenses down to the penny is worth it, what do you do with all of this data?
At the end of every month, it is time for the monthly tabulation. This is where you add up all your expenses and all your income, put them into your personal set of categories for the month and see how you did.
This is your financial scorecard. Which categories got the majority of your spending? Which categories got next to nothing?
Do you agree with where all your money went?
There is no denying that your money went to these places. That is why you are tracking down to the penny, however, each month we should all take the time to reflect on our expenses to see if they are truly going to the things we want.
From your monthly tabulation, you can make a budget for the next month if you would like. If not, that is okay too. By simply tracking your expenses and raising your financial awareness you have no need for a budget because you will be focusing on reducing your spending.
As the months go by, you can start building a chart like the one above that shows your monthly income and expenses plotted together. So long as income is greater than expenses you are doing the right thing, but as your financial awareness increases, you will likely see these lines diverge even farther.
3. Value Assessment
Do you agree with where all your money went? If not, why not? If so, congratulations.
Only you know all the things that truly matter to you. Reflect on what truly matters in your life and then take a look at your monthly tabulation again. This time see if your spending aligns with what truly matters to you.
Personally, I do this analysis once per year because there is more data to look at and see. When I go back through a year of buying things what do I see?
I see most things that I use and am happy with, but there are always a handful or more of things I wish I had never bought. Case in point. I am writing this post on a Samsung Galaxy Tab S2 on my way to work. It is nice and convenient, and I bought it so I could test it out. However, I have found that I really don’t like tablets that much and prefer laptops because of the increased power.
Did that purchase align with my values? Of course not! It aligned with the values of marketers for tablets. But there is no need to dwell. We learn from our past mistakes and continue moving forward.
That is the name of the game.
Continue moving forward.
4. Improvise, Adapt, and Overcome
Now that we have taken a look at our monthly tabulation and decided whether it fits our values, we need to continue with the process. We continue to track our expenses and income down to the penny, continue to do our monthly tabulations and continue to assess our monthly tabulation versus our values.
Each month with the increased financial awareness that comes from tracking and analyzing your results you can make better-informed decisions while spending your hard-earned money.
Money is a limited resource, so treat it with respect. As Clint Eastwood says:
Improvise, adapt, and overcome
Improvise a new plan for spending, adapt it to the circumstances, and finally overcome all the issues you have had in the past when it comes to your money.
Having read the classic Your Money or Your Life, I am reassured of the path to financial success. Following the above steps and the rest that are part of the plan in Your Money or Your Life will lead all of us to financial success. Through financial intelligence and financial integrity, we build the house that is financial independence.
So what are you waiting for?
Get started today with Your Money or Your Life and achieve financial independence!
So readers, have you read this classic FIRE book? What are your thoughts?
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