Why Ever Would I Want To Know How Much I Make And Spend??

Posted On May 3, 2023

They Say If You Can Measure It, You Can Manage It.

If you want to gain freedom, you must become more aware of, and then manage your resources like your ideal life depended on it!

But if you don’t already know exactly what to do to be financially free, don’t feel bad.

We’ve been trained, and our attention diverted, to spend our precious time, money and attention focused on all the wrong stuff.

The wrong stuff is stuff that locks us further into a situation where we need to keep working in order to just pay for our basic necessities.

The wrong stuff is stuff that serves banks, Wall Street, corporations, government, our employers, and others, to our own detriment.

Below are a few quick examples of wrong stuff that we’ve been tricked into doing (and who benefits). Some of these may come as a surprise because you thought they were good for you. They’re often not. You’ll learn more as we continue.

• Making contributions to retirement plans (Bad for you. Benefits Wall Street, government, & banks.)
• Choosing 15-year mortgages instead of 30 (Bad for you. Benefits banks, your employer, & government.)
• Making extra mortgage payments to get it paid off faster (Bad for you. Benefits banks, your employer, & government.)
• Striving to be debt free (Bad for you. Benefits banks, your employer, & government.)
• Other inefficient loans & borrowing practices (Bad for you. Benefits banks.)
• Receiving a tax return (Bad for you. Benefits the government.)
• Thinking that life insurance is bad (This belief is bad for you and your family. Benefits Wall Street and banks.)
• “Keeping up with the Joneses” (Bad for you. Benefits corporations, & your employer.)

We’ve also been trained to not focus on the right stuff.

Simply put, the right stuff is stuff that will lead us to increased financial freedom and the ability to work less, if we wish.

Money is one such thing to put some focus on. We need to attend to it, track it, study it, get to know it, grow to respect and appreciate it, and understand it’s true potential.

We must also understand the true impact of our personal choices on our money, our time, and our freedom. Then we can do the “right stuff”, and we will start to notice sooner when we’re doing “wrong stuff” with our money, and stop it!

A thought exercise

Take a moment and think of yourself as the leader of your own company. It’s called “YOUR NAME” Inc.

You have dreams, aspirations, goals, and desired outcomes for your company. You also have certain resources that you can deploy to help get you where you want to be.

Now, think of your money as your top all-star employee at YOUR NAME Inc.

Your money is a powerful worker. It can work way harder than even you can – if you know how to be a good manager, and provide a work environment where your money thrives.

Money is a perfect servant. As long as you are a good boss, money will never get sick. It will not ask to take vacations. It won’t even get tired or need to sleep, so it can work 24 hours a day, 7 days a week for you. What’s more, it will not die and it will never retire.

But on the other hand, when mismanaged, undervalued, or neglected, money can suddenly slip away. When this happens, it becomes your job to roll up your sleeves and spend your time working hard to find it once again.

If you are unable to be a good manager of money and have it work for you, then you will always have to work looking for money.

Let that sink in.

You have a great responsibility to yourself and your family to track and manage your resources wisely so that they may work for you.

Although money is a perfect servant, it is a horrible master.

Ask yourself these questions:

1. How well do I treat my best employee?
2. Do I give it the time, attention, care, and respect it deserves?
3. Do I treat it like it’s worthless and expendable?
4. Would I want to stick around in any situation where my manager didn’t acknowledge my worth?
5. Do I clearly see the responsibility I have to myself and my family to mind such a valuable resource as my money?

Logging Your KPIs (Key Performance Indicators)

“Simplicity is the ultimate sophistication”

– Leonardo Da Vinci

So, the cold, hard, unfortunate truth is that you have to keep up with some of your basic numbers in order to take back control of your finances and your life.

That said, I am personally not an advocate of overcomplicated and highly detailed budgets right off the bat. Believe me, I have tried them before.

What I’ve learned is that it’s best to start off fairly simply and add complexity only as needed.

So let’s start off simply for now.

As we continue, you’ll have the opportunity to make many choices and create a larger system that you’ll like best.

Tracking Your KPIs: Your Monthly Financial Snapshot

Note: The object here is not to log every little transaction and pay attention to the minutia – even if you normally enjoy that kind of thing.

Your Financial Snapshot is just a place to track your KPIs over time.

KPI stands for Key Performance Indicator. There are many metrics you could be tracking about your finances, but we’ll find that many of them prove inconsequential, and only a few really matter for your big picture progress and financial freedom.

We use KPIs to measure our progress.

Here’s the plan: Once a month, you will quickly check your KPIs for two reasons:

1. To see if you’re making progress in the areas where it counts most to you personally.
2. To log them for future reference.

Logging financial KPIs is only to tell you what has happened. Later, we’ll use different other methods to further examine why and how it happened, and reverse engineer your financial freedom.

I myself use a simple spreadsheet for my Financial Snapshot, but you could also use your Wealth Journal, or a Google doc or Word document.

Your 4 Most Basic Numbers

Although you will have an opportunity to choose personal KPIs that mean the most to you, we will begin with the most basic and common ones to track as a foundation.

At a minimum, the 4 numbers listed below are what we’ll need to get started: (Don’t worry about finding these right now. This is just an overview.)

1. Your Monthly Income
2. Your Monthly Expenses
3. The current value of Your Assets
4. The balance and minimum monthly payments of Your Debts

Choosing A Method

Now think about what feels best for you and make your choice. That’s the main assignment for today.

Here are a couple of things to consider before you choose a place for your monthly Financial Snapshot where you’ll keep track of your KPI’s.

Pen and paper is good because it’s personal. Writing things down by hand allows a real connection between you and the numbers you’re writing. It can also be a similar “real” experience when reading them, and referencing past logs to see (and feel) your financial progress.

On the other hand, you may want to access your numbers while out and about, and you probably won’t always be near the notebook you use for your KPI’s. One way to avoid this drawback is to take a picture of the page with your phone each month and save it to the cloud. You could do this with Evernote, or Dropbox, or any similar program.

Spreadsheets can be good (and it’s what I’ve chosen for myself) because you can create custom formulas that will quickly do a bit of math for you to save time. For example, you can often create new and meaningful KPIs for yourself (more on this later), which are based on dividing one KPI by another, or subtracting one from another. 

A spreadsheet makes this a bit easier. You can also make a spreadsheet accessible from anywhere via the internet.

The drawback for me is that it’s just one more thing I have to do on a screen. That’s something I like to minimize in my life when possible.

A Word Document can be another alternative. I don’t have too much to say about this way of doing it. Some people might find it nice to write notes.

The drawbacks and benefits of having it be digital apply here too, just like with the spreadsheet method.

#1: Income

“Knowledge Is Power”

– Sir Francis Bacon

Build Awareness Around Your First Basic Number: Income

Ok, to review: Below are the key numbers we’ll be gathering in the coming lessons.

After becoming familiar with the numbers below, you’ll go on to log these numbers once a month as KPIs in your monthly Financial Snapshot.

Today’s assignment is to gain insight into #1 on the list. We’ll get around to the others later.

1. Your Monthly Income
2. Your Monthly Expenses
3. The current value of Your Assets
4. The balance and minimum monthly payments of Your Debts

Fundamental Income Goal

One fundamental goal for all of us when it comes to our income is this:

Our average monthly income from all sources should be higher than our average monthly obligations like lifestyle expenses and debt payments.

This means that we are not sinking further into consumer debt and that we are consistently growing our net worth (more on net worth later).

Your Income Sources

Sit and think, and use a notebook to write down all your sources of income one by one. The main point of this is to know how much money is passing through your hands in total and from where.

List each individual source separately. For example, if you have 2 different side hustles, each one should be a separate income source on your list.

Note: Look at your paycheck stubs carefully. When putting paycheck income on our list, we must make sure to list the total income before any retirement contributions, health insurance, or other optional payroll deductions come out of the check. Basically, you want to be aware of all the money you could have had control of, and recognize that you are choosing to give up control of these payroll deductions before ever even receiving them. This may not be the best move. You’ll see more about why later.

Common sources of income you may have:

• Pay Checks
• Business Distributions
• Side Hustles
• Commissions
• Investment Dividends
• Insurance Dividends
• Interest from Savings Accounts
• Interest from Loans Given
• Family / Gifts / Inheritance
• Selling Stuff Online
• Credit Card Points and Statement Credits

Once you’ve made your list, put a dollar amount next to each source representing the Average Monthly income from that source.

For example: If your grandmother gifts you $1200 one time per year, then you’ll write “$100 per month” next to that source on your list.

Catagorize your income

Now it’s good to know what type of income you currently receive, so you can intentionally tweak the ratios. The three basic types of income are categorized in correlation with the degree to which they depend on your activities. They are the following.

• Earned Income: This income is closely tied to your labor, such as a wage or commissions.
• Portfolio Income: This type of income comes from assets rather than labor, such as business or investments. Although the assets take a degree of management by you, the income is not closely linked to your labor.
• Passive Income: This income comes in regardless of your activity, such as annual credit card statement credits, social security, or gifts from a family member.

Write a note next to each source’s dollar amount so you can get an idea of your income types.

What Do Your Numbers Tell You?

Sit and think for a moment about what these numbers mean. Then write about it in your Wealth Journal.

Here are some starter questions to get your juices flowing:

1. Do any of my sources of income take more of my time than they’re worth?
2. Are any of them very easy, or very enjoyable for me?
3. Do I see a clear way to increase any of my income?
4. Are there any sources that will soon end?
5. Do I have any passive sources of income?
6. Am I forgetting any sources of income?
7. What other questions can I ask myself about my income?

Choose A Way To Automatically Log Transactions (Small Picture)

“Simplicity is the ultimate sophistication”

– Leonardo Da Vinci

You Can Have The Minutia Tracked Automatically

You’ll be sitting down once a month to do your Financial Snapshot manually, but I find that there’s usually no need to log each individual purchase each day throughout the month, as some people recommend doing.

I have tried it, and for me, logging each transaction only leads to frustration, distraction, interruptions of my day, and time wasted on unimportant busywork. Each of your transactions can easily be aggregated automatically to save you tons of time, and headspace.

Once per month, when It comes time to look at your KPIs, you can also spend a few minutes glancing over your transactions that have already been neatly compiled for you automatically. When set up this way, the whole process should take about 30 minutes per month, and save you from headaches along the way.

Setting Up Your Financial Dashboard

You will want a good way to automatically log individual transactions, gather your numbers together, and then access them so you can study and use your data – a “Financial Dashboard,” of sorts.

RocketMoney.com

Rocket Money is a site that will import your bank and credit card transactions automatically, and compile them in one place. Then it’ll be easier for you to review your numbers to track your income and spending and make financial decisions.

It costs about $4.50/month.

Rocket Money has a clean user interface. It’s the site I now use personally after trying many solutions in the past.

A couple of similar software I like are

• Monarch
• Simplifi

As a free option, some banks have special software on their online portal that essentially does this work as well. If you like, you could check your bank’s website to see if it will work for you.

Your Assignment:

(should you choose to accept it)

Set up an account to be used as your personal Financial Dashboard and link all your bank accounts, cards, and other loans so that transactions will be logged automatically throughout the month.

I recommend RocketMoney.com, but you can explore different options if you feel like spending the time.

#2: Expenses

“Knowledge Is Power”

– Sir Francis Bacon

Your Second Basic Number: Expenses

To review: Below are the key numbers we’ll be gathering in this step of your journey.

After becoming familiar with the numbers below, you’ll go on to log these numbers once a month as KPIs in your monthly Financial Snapshot.

Today’s assignment is to gain insight about #2 on the list. We’ll get around to the others later.

1. Your Monthly Income
2. Your Monthly Expenses
3. The current value of Your Assets
4. The balance and minimum monthly payments of Your Debts

Fundamental Expenses Goal

One fundamental goal for all of us when it comes to our expenses is this:

The monthly average of all our expenses (lifestyle expenses plus other obligations like debt payments plus any automatic paycheck deductions) should be lower than our average monthly gross income.

Expenses being less than income means that we’re not sinking further into consumer debt, and that we are consistently growing our net worth (more on net worth later).

There are two ways to increase this surplus.

1. Reduce expenses
2. Increase Income

But the first step is to become aware of each of them, which is the reason why we’re here right now.

Your Average Monthly Expenses

Sit and brainstorm. Use your notebook to write down all your expenses.

Alternatively, you may want to do this exercise in a new spreadsheet for easy editing later.

Don’t worry about the dollar amounts yet. Just focus on making a long list. Brainstorming all the things you can think of right now that you spend money on. And don’t stress this exercise. This won’t be the last chance you get to list an expense.

Three weeks from now, if an expense comes up that isn’t on the list, you can simply add it then.

List each individual thing you spend money on separately. For example, if you have multiple recurring subscriptions, put each subscription on a different line.

Monthly Expenses

Start by listing recurring monthly expenses.

Some fixed monthly expenses may include:

• House (rent, mortgage, taxes, insurance, etc.)
• Utilities (cell phone, security system, cable, internet, etc.)
• Auto (lease/loan payments, insurance, carwash, etc.)
• Insurance (life, disability, health, umbrella, etc.)
• Subscriptions (software, publications, streaming, services, memberships, etc.)
• Child (daycare, babysitting, children’s lessons and activities, etc.)
• Retirement Contributions (401k, IRA, etc.)
• Taxes
• Debt Payments

Some variable monthly expenses that can change from month to month may include:

• Utilities (electric, trash, gas, sewer/water, etc.)
• Transportation (gas, parking, public transportation, etc.)
• Food (groceries, restaurants, delivery, work lunches, snacks, etc.)
• Personal care items (barber/salon, drugstore, etc.)
• Recreation (entertainment, sports, hobbies, etc.)
• Savings

Less Regular Expenses

Now list any predictable expenses that recur less often, like quarterly, annually, or every couple years.

Some less regular fixed expenses may include:

• Insurance (if payed annually)
• Auto (registration, smog)
• Memberships
• Subscriptions
• Credit card annual fees
• Summer Camp
• Licensing
• Professional expenses

Some less regular variable expenses may include:

• Taxes
• Clothing & shoes
• Auto maintenance, tires, etc.
• Home maintenance, landscaping etc.
• Tuition/Training

Monthly Averages

Now that you’ve made your lists, put a dollar amount next to each expense representing the Average Monthly amount. For monthly expenses, this is pretty straightforward. For less regular expenses, you’ll have to do a bit of maths.

For example: If new tires cost you around $1200 once every 4 years, then you’ll write “$25 per month” next to that expense on your list. You’d get this number by dividing the $1200 by 48 months (the number of months in 4 years).

You should be able to quickly access these numbers if you’ve set up your Financial Dashboard in the last lesson. Otherwise, you may need to look at some bank or credit card statements to get the numbers you need, and it could take much longer.

Identify and label Passive Expenses

Passive expenses are those where you are charged for something regardless of your activity. These are often thought of more as “Bills” rather than, say, “Shopping” expenses. You could be asleep, or dead, and you will still be charged. A good example is your Netflix subscription. This being said, some bills do require activity on your part to calculate the charges, so they are not Passive expenses. These might include utility bills, etc.

Put a “P” next to each of the expenses you identify as Passive.

What Do Your Numbers Tell You?

Sit and reflect for a moment about what these numbers mean. Then write about it in your Wealth Journal. Here are some starter questions to get your juices flowing:

1. Do any of my expenses bring great joy to my life?
2. Are there any expenses that if increased, could make me more income or bring more joy to my life?
3. Do any of my expenses bring absolutely no satisfaction to my life?
4. Do I see a clear way to eliminate or lower any of my expenses without lowering my quality of life?
5. Are there any recurring expenses that will soon end? Soon begin?
6. Am I forgetting any expenses?
7. What other questions can I ask myself about my expenses?