track your income and expenses

The #1 Financial Mindset for Wealth: Track Your Income and Expenses!

Erik Basics, Financial Education, Thoughts of a Mastermind 15 Comments

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What gets measured, gets managed.

I’m on the pursuit of overall life mastery. With many things in my life, I’m constantly tinkering, experimenting, and pushing to see where my comfort zone is, where my comfort zone ends, and how I can become better.

To do this, I benchmark my progress: through note taking, writing in a journal, and tracking my actions over time.

The simple act of writing down what I’ve done today, and reviewing these notes weekly, monthly, and yearly has made a tremendous difference in my life.

One of the areas I’ve seen the biggest impact as a result of my tracking efforts has been my personal finances. Through tracking, I’ve realized there are certain months where I spend too much on food or went over board on Amazon purchases. There were even a few times when I came to the realization I would need to do a no spend weekend or two to make the next credit card payment.

At the end of the day, I came away being able to pay off my card, and it was all because of my consistent tracking habits.

In this post, I’m going to share with you why it’s important to track your income and expenses over time, what metrics you can look at to see your progress, and talk about some apps and tools you can use to help this process along.

Let’s get it trackin’!

Track Your Income and Expenses: An Example

why financial literacy is important

Knowing where you are financially is so important to financial success.

I have two friends: Jack and Jill. Jill tracks her income and expenses, and Jack doesn’t track his income and expenses.

Jack and Jill work at the same company and are in the same team, both making $5,000 a month.

Jill, the Tracker

Jill, the tracker, wants to retire someday, and a few years ago, she started putting away $500 a month into an investment account. Now, she is married and just gave birth to her first kid. As a result, her expenses have gone up but she still has kept in mind this goal of saving for retirement.

Before having her child, she was spending $500 a month on food and drink with her husband. Now, since they have another mouth to feed, she realized that their combined food spending would about $750 a month if she kept eating out. Instead, she changed her habits and started bringing her lunch from home a few days a week.

With this simple change, and even with an extra mouth to feed, Jill is still only spending $500 a month on food, did not alter her lifestyle too much, and is still on track for retirement.

Jack, the Non-Tracker

Jack, the non-tracker, wants to retire soon, but doesn’t know where he is at on a monthly basis. He puts $500 into his retirement account because he heard that it was a good idea on some radio show. In addition to this, he has been saving on average a few hundred dollars a month in cash which he adds to one of his investment accounts here and there.

Recently, he got married as well, and recently gave birth with his wife to a newborn. His expenses have increased, but he is not really sure how much.

One of the things he loves is watching football, and in particular, going to games at the local stadium. Even with his newborn, he still wants to go to games.

With the increased expense of having a kid, his cash savings goes to 0, and now he isn’t getting those additional savings.

A few months later, he realizes he can’t make his usual investment account contribution and is a little puzzled, “oh well, I guess we just bought a few more diapers than I thought, I’ll make the investment next month.”

His next investment is never made because he has no idea how much cash he is saving each month.

Who’s going to be more successful in the long run?

Who is going to be more successful financially in the long run? Jack, the non-tracker, or Jill, the tracker?

I’m going to guess Jill is going to be more successful financially.

She knows exactly where her money is going at the end of the day. Jack on the other hand does not.

I hope this example helps paint a picture of why it’s important to track your income and expenses over time.

You never know when life is going to rear it’s ugly head and throw some unexpected expenses at you – but with proper tracking, you can navigate these rough roads much easier!

4 Personal Finance Metrics to Track

You know why tracking your finances is important, so let’s get into the theory now.

There are 4 personal finance metrics which I believe everyone can track and ones that I find very important in my own life:

  • Gross Income
  • Gross Expenses
  • Savings Rate
  • Net Worth

Gross Income

Gross income is how much money you made in a certain period.

If you are an hourly employee, you must figure out what is your hourly wage, and how many hours did you worked. To calculate your gross income, take your hourly wage multiplied by the number of hours you worked.

If you are a salaried employee, take your salary, and divide by 12 months to find your monthly wage.

If you have investment income, or any other freelancing or consulting income, you can find your gross income by adding up what you are paid each month.

Tracking gross income over time can help you understand what is coming in – essentially, your gross income is what you have to work with each month and each year.

Gross Expenses

After income, calculating gross expenses, the total amount of money you spend during a month, will give you what you spend each month, and help identify if you have any weaknesses in your budget.

You can categorize your expenses however you find most effective. I split my expenses into some broad buckets, and then dive deeper to get a better understanding of where my cash is actually going each month. There are a number of things I look at over time:

  • Discretionary Spending: food, drinks, recreation, travel, home improvement, cash withdrawals
  • Utilities: internet, gas, electric, water
  • Mortgage/Rent: principal and interest on mortgage, home insurance, renters insurance, property taxes, PMI
  • Auto: gas, auto insurance, maintenance, parking, principal and interest on an auto loan
  • Other Insurance: dental, health, umbrella policy, life insurance
  • Taxes: federal, state, social security, medicare

If I had kids, I could imagine having more line items for diapers, clothing, child care, sports, saving for college, etc.

Like I said, you can categorize your expenses anyway you’d like. Personal finance is personal! 🙂 For example, I lump food and drink together. Splitting them up makes sense as well, but I don’t drink as much anymore, and as a result, I simply have kept it as food and drink.

Savings Rate

track your income and expensesOnce we have our income and expenses for a certain period, we can move on to a slightly more complicated metric: savings rate. (it’s not too complicated, just some division added to the mix 🙂 )

A person’s savings rate is the percentage of income which a person saves in a given time period.

Simply put, it can be calculated as gross income minus gross expenses divided by gross income.

Let’s say a person makes $5,000 in a month. They spend $3,000 of it and the rest is saved in their savings account. Then, their savings rate for the month is 40%, or ($5,000 – $3,000) / $5,000.

It gets a little bit more complicated once you start factoring in contributions to investment accounts, principal pay down of debt, and other balance sheet moves.

For me, I don’t count these as expenses because like I just mentioned, these are balance sheet moves. For contributions to investment accounts, this is your money and looking at it from an accounting perspective, a balance sheet transfer.

For paying down a debt, I do consider interest to be an expense, but the principal is your money – again, it’s a balance sheet transfer.

At a minimum, people should aim to save at least 10% of their income. Personally, I’d suggest aiming for 25%+, if you can, to help your financial situation improve quickly.

Net Worth

The final piece to the personal finance puzzle is your net worth.

What is your net worth? It is your assets minus your liabilities.

Let’s start with assets.

Assets are things a person owns which have value. Typical assets are houses, stocks, cars, pension plans, bonds, precious metals, currencies, cash, businesses, and the list goes on and on.

Next, what are liabilities?

Liabilities are things a person owes, either to a bank, a financial institution, or another person or business. These include credit card balances, mortgages, auto loans, personal loans, liens, and the list here goes on and on as well.

To calculate net worth, take assets and subtract liabilities. It’s great if the result number is positive, this means you have a positive net worth! If you have more debt than assets, then it’s time to destroy that debt!

Over time, you want your net worth to be increasing. If you have a positive savings rate, then your net worth will be increasing since you will be increasing the asset side of the equation.

Apps and Tools to Help You Track Your Income and Expenses

personal finance is personalAfter learning about these metrics, now it’s time to put this knowledge into action!

For me personally, each month, I pull all of my transactions from my Mint account into my Income Statement Spreadsheet. I categorize my transactions and see exactly where my spending and saving rate landed during the month, and look to see if there are any trends forming.

This is what I use, but you are your own person and might like a different method. I’m a big advocate of thinking critically, so stopping here would be short-sighted on my part.

There are a few other personal finance tools and applications I’ve used in the past which I believe deserve a look as well:

For you, you’ll have to figure out what works best for you.

Some of my friends download their transactions from their bank directly. Others similar tools like Mint or Personal Capital. Others analyze your income and expense through their online banking application.

All of these methods are acceptable – as long as you are getting the COMPLETE picture of your finances. If you have multiple bank, debt, and investments accounts, make sure to look at all of them!!

Conclusion

What are your goals? Are you on pace to reach them? Do you know what a snapshot of your finances would look like? What are you spending your money on each month and are these transactions contributing to your happiness or not?

Each day, I look to make my life just a little bit better than the day before. Like I mentioned above, when I start to tinker with something in my life, I have to remember where I was before, so I can see if I’m better off changing or if I should stay put in my ways. Tracking has helped me in my daily efforts, but has also resulted in some great success in the last few years.

For you, what you do today matters. What you do every day matters. Successful people are those who understand that the little choices they make matter and because of that they choose to do things that seem to make no difference at all in the act of doing them, and they do them over and over and over until the compound effect kicks in.

Tracking your income and expenses over time is easy. Can you download a CSV file from the internet? Can you open up Excel and categorize and summarize your transactions? Would you be more comfortable downloading an app from online to help the process along?

Start tracking your income and expenses, or if you already are tracking these, go back and look at your progress over time. Look at some of your spending weaknesses and make some adjustments to the next month.

Remember: what gets measured, gets managed. 

Readers: are you tracking your income and expenses over time? Are there other activities you’ve tracked or are currently tracking that you’ve seen improve over time? 

Erik

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Comments 15

    1. Post
      Author

      From a business perspective, there’s the income statement, balance sheet, and statement of cash flows. Net worth is just one piece of the puzzle and yes, while an increasing net worth is the goal, it’s not the driver of wealth 🙂

      Thanks for the comment!

  1. Love this! I don’t track our net worth that often, but I have the spreadsheet I downloaded from J. Money and I make an attempt to update it semi-sorta-regularly. But income/expenses… YNAB over coffee every morning is my happy zen time (which might speak to the excitement of the rest of my life, LOL). It’s the times that we’ve fallen off track with measuring our income/expenses that we’ve really fallen down financially.

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      Author

      Haha! I’m sure your life is more exciting than YNAB over coffee! I love personal finance because it ties in so nicely with self improvement. Tracking your fitness, or eating, or reading, or whatever you want will help you in your goals. It’s the same as personal finance 🙂

  2. I’m a fan of excel and personal capital to keep track of my money. I like being about to crunch my numbers in a spreadsheet to see if I increase/decrease saving/spending in certain areas how that affect my overall picture. I’m a fan of saving all receipts or review all expenses periodically too, a great way to identify any leaks in your spending, unlike Jack. 🙂

    1. Post
      Author

      Jack is not someone to look up to!! 🙂

      I love being able to dive in and crunch the numbers if necessary as well 🙂

      thanks for stopping by Brian – have a good weekend and looking forward to Monday!!

    1. Post
      Author
  3. Important post, Erik! Knowing where you stand on each of these financial measurements gives you a fuller picture of your finances and the ability to compare them over time. I’ve been tracking using Quicken and spreadsheets for the past dozen years. It really helps to keep me on track toward my goals.

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  4. Great advice Erik, I’ve been using excel to track my income and expenses for years now, and it is become very time consuming. I have now purchased a subscription to a service that takes feeds from my bank and auto categories certain things. Saves soo much time. It cost about the same as two coffees a month. I know I could be saving this money and doing it myself. But it would take me several hours a month to get through my tracking. Just my two cents worth.

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  5. Pingback: 23 Finance Experts On How To Manage Your Money In 10 Minutes Or Less

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