I hate the word “budget.” It reminds me of being on a diet. For some reason, In this day and age our human nature struggles with limits. So when I speak with people about their cash flow, I don’t talk about budgeting, I talk about expense tracking. I don’t care what you’re spending your money on, I just want to know how much money you’re spending and if those will costs be the same in retirement. Having this information is crucial to better understanding your financial position.
Tracking Monthly Expenses
I am old-school. I don’t use a pencil and graph paper, but I do use a spreadsheet and I store it in Google Drive, so at least the next time my hard drive crashes I will be ok. I started a perpetual spreadsheet that has nearly eight years of columns—a lot of historic information. Each month I can see how much my total expenses are because I enter the actual cost of living into my spreadsheet. I put the months across the top, and the categories on the side. At the bottom of the sheet, of course, I total up the cost of living and then also add in income to see if our household had a profit or a loss for that month. It is very powerful to be able to look at one row of data and see years of results, particularly if you’re running a surplus. I tell nearly every client they need to be doing this each month. But how many actually do the work? Pretty much nobody, which is sad, because it only takes an hour per month. (For related reading, see: 8 Steps to an Organized Financial Life.)
Tracking Personal Net Worth
It’s not just the expense tracking. From Gary Keller’s book, The Millionaire Real Estate Investor, I got the idea of buying a million dollars worth of real estate using other people’s money. I read the book in 2005 and 2016 and it was an excellent read both times. It was a little funny reading it in 2016 knowing about the 2008 crash, but nonetheless, the fundamentals are rock solid. In this book, Keller talks about how he met with his friend each week for breakfast, and each week they updated their net worth statements together and asked themselves, “What am I doing today to increase my net worth?”
In my opinion, updating your net worth statement weekly seems like overkill. However, I do suggest people track their net worth each month—similar to the expense tracking. What’s neat is that you can look at one row over years and years and see your progress. Of course, mine starts in 2009 since the last hard drive crash, and everything has been pretty darn good since then because it was the low of the recession. I like to track liquid assets, real estate, investments and liabilities. Each month you can see if your net worth increased or decreased.
Having this data, either in the form of an income statement or net worth statement, is what every business must have. But only 1% of households have this type of data. Data can help you understand what is actually going on, and help you make better decisions going forward, which is ultimately my mission. A lot of people make terrible decisions because they don’t have the understanding of where their money is going. Grow your net worth! Start by following the suggested exercises.
(For more from this author, see: Using Your HSA as an Investment Account.)
For more information, you can listen to the podcast Finding True Wealth.