The only way you become rich is by tracking your progress. In order to track your progress on the path to financial independence, you need a tool that aggregates all of your financial assets together into one easy to view dashboard.
The best platform I have found for financial tracking is Personal Capital. Personal Capital is free and allows you to connect all of your accounts to it. It then aggregates everything and allows you to analyze all aspects of your financial health, from day to day expenses, to year long trends and everything in between.
For the remainder of this post, we are going to take an in-depth view of all of the functionality of Personal Capital and explain how I use it to improve my finances.
Being able to easily connect your accounts is very important for online platforms that pull all your finances together. Personal Capital makes it easy to add all types of accounts:
- Credit Cards
- Fixed Assets
First, you choose the type of account, then the company that holds the account. Next, you input your username, password, and sometimes secret question answers. These are required for Personal Capital to log in to your account to pull the information. Personal Capital has worked with every bank that it is compatible with to ensure correct connectivity without exposing any security risks. Personal Capital explicitly states that it does not modify any of your data at the bank. The largest concern people tend to have is the security risk of having all of your usernames and passwords stored online by one company. I understand their concerns, but Personal Capital has top rate security and has not lost usernames and passwords to hackers.
If you ever feel unsecure with Personal Capital and want to delete all of your data, you are able to with a simple delete function under accounts. It will delete all history and all of your saved passwords leaving no trace of your data.
The only downside to Personal Capital in terms of connecting accounts is that it is US based only. If you are from outside the country or you have assets around the globe, then Personal Capital will not be able to pull those assets automatically. You can, however, add them manually as a fixed asset over time.
Because I live in China, I have a couple of Chinese bank accounts that Personal Capital cannot pull. However, it is not a big problem, since the majority of my assets are in the US. As far as I know, there are no platforms as of June 2017 that can pull financial data from banks worldwide, so this is not a problem unique to Personal Capital.
The most important part of any financial software is giving you an easy to digest overview of your financial situation. Many people will not dive down into the details, so the dashboard needs to be excellent in order to get us to take action. Personal Capital nails it here. The dashboard has all the essentials at a quick glance. Net worth is the most important variable here and it gives a 90-day history of your net worth. All of the widgets on the dashboard supply essential information. One widget that is more unique to Personal Capital is the investable cash widget, which gives you a glimpse of how much cash you have on hand that could be working harder for you in the market. This does include your emergency fund, so you should have some amount always in your investable cash.
In order to get the most out of Personal Capital, you will need to review your transactions on a regular basis and place them into categories. Personal Capital does this automatically, however, it is not always accurate, so you need to choose the categories that make the most sense. You can also add categories for more customized analysis. The tool is very easy to use, like the rest of their platform.
You can also manually input your cash transactions to capture all of your spending. One place to be careful here is with transfers. Many times a transfer to an investment account is considered an expense, while it is truly a transfer to another asset so it will appear that your expenses for the month are higher. By qualifying transactions as transfers, you are able to let the software know that this is an asset to asset move rather than expenses.
As you pursue financial independence, net worth is one of the primary metrics that you will track.
Net Worth = Assets – Liabilities
Net Worth = (Cash & Cash Equivalents + Investments + Real Estate + Personal Property) – Debts
I started my journey out of college at -$30,000 net worth and have managed to reach $318,000 after only 5 years. The Personal Capital net worth view allows you to adjust the date range to view as much or as little data as you like. I find the longest history gives the most meaning when looking at net worth, but growth over the past year or the present year are also beneficial views. Personal Capital starts storing data as soon as you link accounts and never deletes it unless you explicitly tell it to delete. Using this view will help to motivate you as you see your progress. If you watch it go down, you can look into why it dipped. Was it a stock market crash? Did I spend too much? These answers can be found in the following views.
Also, you can view the trended growth of cash, investments, credit card debt, loans, and mortgages along with individual accounts.
The cash flow function of Personal Capital is their answer to budgeting needs. In the cash flow view, you can see income and expenses you make on a month to month basis. The plot also shows the net income or profit for the month. On any good month, you want this to be positive meaning you created a huge profit. Looking at trends in your cash flow from month to month can help to identify areas to look at in order to quicken your journey to financial independence.
The expense and income charts of Personal Capital are some of my favorites. They have a very clean look and aggregate all your data into a view where it is easily digestible. In this view, we can see the different categories that we spent money on last year. I have a huge amount in the “Uncategorized” category because Personal Capital does not place everything automatically into categories for you. Personal Capital does learn your spending over time and can predict categories better after consistent use. The year-long trend above also shows the variable spending we had throughout the year.
In the income view, you are again able to analyze various time periods. These time periods are available for all trends and allow you to drill down or pull back to see your data. Personal Capital gives you the tools to analyze your data and does not limit their functionality. Here, you can see I had a fairly regular paycheck except for April which had our tax refund come in. If you have multiple income streams the pie chart can help to see which ones have a larger impact on your finances. It can also help to motivate your pursuit of side income as a means for financial freedom.
In the one month view, the bar chart becomes a line chart and plots your income throughout the month. This one shows that I get paid once per month on the last working day of the month. It also compares it with the previous month to allow us to see how we are doing on a month-on-month basis. An ongoing comparison is crucial to progress. Looking at any single month in a vacuum does not produce good analysis and Personal Capital helps us to analyze over time.
The most impressive feature of Personal Capital is its suite of investment analysis tools. There is no other platform that allows you to aggregate all your investments together and get a total view of your investments quite like Personal Capital. In the investment analysis tools Personal Capital has:
- US Sectors
Many of these features are available on other platforms, but none are as cleanly implemented as Personal Capital. Personal Capital is like having your own investment analyst by your side. If you want a portfolio manager, Personal Capital has you covered there as well, offering paid portfolio management at a very reasonable cost. If you use my investment allocation and investment philosophy, you will not need a portfolio manager, but they are very professional and come highly recommended for their conservative approach.
The holdings view is pretty much what you are used to looking at if you have been investing for any length of time. It gives you a nice overview of what you have, how much of each you have and how it has changed recently. My only wish here is that it was not 1 Day change, but week or month change. Looking at your stocks and mutual funds day to day just shows you pricing noise and doesn’t really mean much. Investing is for the long term. Viewing the comparison with the S&P 500 is useful because it can help you understand if you are making returns the same as the market or not. You can also plot your holdings vs the DOW, Foreign, and US Bonds.
The Balances view shows your investment accounts stacked on top of each other. I have multiple IRAs, a 401k, an HSA, and a brokerage account that are stacked here. You can watch as they change value over time and get a feel for how they each contribute to your overall success and net worth. Personally, I don’t find this view too helpful, but others may find more benefit with more accounts scattered around.
The performance of your investments is of utmost importance. We all want to retire earlier and to have a net worth that is higher. This view shows the growth of your total portfolio over the selected time period. Every view also has an option to view by specific accounts or to filter out certain accounts. This enables you to drill down into your growth and see which account is driving your growth.
Obviously, 2017 has been a good year so far, seeing a crazy 8.93% growth for my portfolio in under 6 months time. Just be careful here. Investing needs to be for the long term. This view is better over 1 year or longer periods. Looking at a short time period can lead to emotional decisions which are bad for your net worth.
The investment allocation view of Personal Capital is their most unique view. This gives a great visual of your portfolio allocation and is very in depth. If you invest in mutual funds, like I recommend, then you may not know everything that is inside it. VTSAX has 3,000+ stocks in it, not all of which are classified under US Stock. The Personal Capital Investment Allocation algorithm looks inside your mutual funds and classifies each individual stock to give you a true portfolio allocation. This tool can really help you to reach your ideal investment allocation and keep you on track when you are targeting a specific allocation. You should keep an eye on this over the year and rebalance once per year to maintain your desired allocation.
The final investment tool Personal Capital has for us is the US Sectors tool. Obviously, as an American platform, the investment tools focus on American stocks. It is generally advised to be well diversified across industries, so this tool can help to ensure that you are diversified. When investing in broad index funds, you do not have to worry about your diversification. However, if you are building your own portfolio of stocks, this tool can help to ensure you are well diversified.
The investment checkup option is Personal Capitals lead page to portfolio management by Personal Capital. They show their model for the ideal investment allocation along with a Monte Carlo analysis of investment risk. They also show how they can guide your portfolio through the years and help you harvest tax losses and reduce fees. The portfolio management by Personal Capital is a pretty good deal if you want completely hands off investing.
Retirement Fee Analyzer
Fees can eat away at your retirement savings. Therefore, minimizing your fees should be high on your priority list. Many times, the fees for funds are hidden or not made obvious, so investors do not understand the amount of money they are losing to fees. The Personal Capital Retirement Fee Analyzer plots up your fees to retirement to show you the amount of growth potential you will lose due to fees.
This tool is very helpful to visualize the effects of fees and force us to look for cheaper funds to invest in. A major source of fees is the 401k. Many 401ks have poor quality fund choices that have high fees. These fees can eat away at our savings even though 1% does not sound very high. As can be seen above, even just a 0.04% fee over 8 years cost $1,632. 25x that amount, or 1%, would be more the $40,000 in fees for a fund charging 1%! That is a full year of living expenses! Use this tool to help you visualize how damaging fees can be to your retirement nest egg and motivate you to find the cheapest option.
I saved Personal Capital’s best tool for last. Their Retirement Planner tool is fairly new and is an excellent way to start to look at early retirement. Too many retirement analyzers put constraints on the values you can put in, but the Personal Capital tool allows you to use whichever values you would like. The constraints are based on the assumption that people cannot save a significant portion of their income. We must spend all of our income, right? Here we are able to input our savings per year, expected social security, expected spending per year, assumptions of portfolio growth and others that allow the calculator to give more detailed results.
I could devote a whole post to the usefulness of this retirement analyzer, but for now, let’s just say, I love it and highly recommend using it.
Personal Capital is a wonderful tool for analyzing your personal finances. Their web app is second to none and is also available in a mobile app that has 90% of the functionality. I have used Personal Capital personally for 3+ years and have had very few issues with it. Any connectivity issues I have had, have been resolved quickly by customer service. I have no misgivings about recommending this tool to my friends. If you want to track your finances the easiest way possible and get all the analysis tools of a pro, give Personal Capital a try.
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