How can you tell if your financial state is improving? It’s not a state of mind. How many times have you felt like you were really turning the corner one day, but than you’re miserable about your finances the next day?
The only way to see improvement is through real numbers. I find it best to review these numbers once a month. A monthly review of your personal finances is quick and easy way to know exactly where you’re and exactly where you’re headed.
If you’re looking for new financial habits to develop, start with a monthly review. This one habit will guarantee success to whatever financial goals you might have.
Step 1: Accounting
What is one thing that all successful businesses have in common? They account for every dollar that goes in and out.
What do all successful people have in common? They think of themselves as a business owner no matter whom their employer is.
Now let’s use our math skills. If successful businesses keep track of what they spend and successful people think of themselves as a business, than successful people must also keep track of what they spend.
For whatever reason, the word budget scares a lot of people. The thought of sitting at a kitchen table with a shoe box full of receipts and a ledger is what our parents did.
It’s simple to account for what you spend, especially if you use credit and debit cards for all your purchases. Here are three sites that will do this automatically for you, for free.
Personally, I just use the family budget template in Google Docs and update it once a week. Total time is about 5 minutes a week.
The purpose of the budget is it tells you exactly how money came in and out of your life during a time. Guessing on what areas you spend money on can only take you so far.
The first step to your monthly review of your finances is reviewing your budget. Look over your sources of income and expenses.
While reviewing here are some questions to for review:
- Did I spend less than I earn?
- Did I spend more or less than average? Why?
- What expenses provided the most enjoyment?
- What expenses provided the least enjoyment?
- How can I improve next month?
- What goals can I set for next month?
Step 2: Update Net Worth and Net Wealth
Who said your monthly review of your finances is a boring and tedious chore? After a few months worth of data, updating your net worth and net wealth is very encouraging.
To calculate your net worth, add up your assets and subtract your liabilities. Your net wealth equals your net worth over your average daily expenses. This will give you the amount of days you can live off of your current assets.
Your net wealth is the most transparent statistic in personal finance. No other statistic will give you a better sign of your improvement/decline of your financial state.
Don’t worry about comparing your net wealth with others. Your main concern is improvement from month-to-month.
In an earlier post I wrote a more detailed description of how to arrive at your net worth a net wealth.
Step 3: Pay Yourself First
One financial habit you need to develop to build wealth is paying yourself first. In this step you will put a percentage of your income towards things that are important to you.
How you go about paying yourself first depends on your bank and the consistency of your income.
The online bank that I use, ING Direct, lets me set up multiple savings account or sub-accounts. As of right now, I have about 8 savings accounts inside all with different nicknames. The nicknames on the account correspond to the financial goal I have. Here are some typical savings goals to get you started.
- Emergency Fund
- Debt Payoff
- Home Repairs/Upgrades
- Roth IRA (just transfer money directly into Roth IRA)
If your bank doesn’t let you set up multiple savings accounts, keep track your goals in a spreadsheet. For example, you might have $10,000 in a savings account, which 10% of it is towards travel.
The next variable to paying yourself first is the consistency of your income. If your income is consistently, automatically transfer a specific percentage of income to each sub-account. For example, if you make $2,000 a month and want to appoint 5% of your salary towards travel, set up an automatic deposit of $100 into your account nicknamed travel.
If your income isn’t consistent, total up your income and then make the deposits manually.
If you don’t have enough to make all your deposits, go back to your budget. If these goals are important to you, what did you spend money on in the last month that wasn’t important?
Step 4: Don’t Worry About Money
The biggest benefit I get out of a monthly review is I know exactly where I’m at and exactly where I’m going. This one habit takes all the worry out of personal finance.
Notes – I’m always looking for improvements to my monthly review. I’m working on more visuals to get a better overall picture of where I’m at. I give an update once a month, to hold myself accountable, in my newsletter along with many other wealth building tips. Sign up on the top right of this page.
Also, if you’re interested in using ING, which I highly recommend, send me an email. You can get a $25 bonus for signing up as long as you have $250 to deposit.