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Tracking Your Finances

The first step towards achieving financial freedom is understanding where you stand with your finances. Without an understanding of your finances you would not know where to focus your improvement efforts. The two major financial metrics that everyone should track to understand their financial position is – net worth and monthly expenses.

Net Worth

Understanding your net worth is important to know where you stand in terms of your finances. Net worth includes all your assets such as your savings, 401(k) or IRA’s, any stocks or mutual funds and all your liabilities such as your credit card payments, student loan payments, mortgage payments, car payments etc. You can use a simple tools such as an excel sheet to track these items. Understanding you net worth will give you an overview of where you stand with respect to your assets and liabilities. This would give you and idea of how much you will need to save to achieve your financial goals.

Monthly Expenses

Monthly expenses is a very important metric one should track to understand your financial situation. Tracking this metric will help you understand your financial behavior and your spending habits. Once you have a good understanding of you spending habits, you can focus your efforts on cutting down unnecessary spending and bring down your expenses and increase your savings.

In order to track your expenses there are several tools available online. You can use a tool as simple as an excel sheet. All you would have to do is once every week write down all your expense in an excel sheet. All expenses including credit card payments, cash expenses, any loan payments, mortgage payments, utility bills, cable and internet bills etc. should all be included. It’s important that you religiously and meticulously record all expenses. At the end of the month you can then analyze your expenses to understand trends in your spending habits. You can break down your spending into two categories such as essentials and non-essentials.

Essentials are expenses that are required and are non-negotiable. Whereas, non-essential expenses are expenses that can be considered as discretionary spending such as eating outside, electronics, clothes etc. You should focus your efforts on non-essential expenses and try to reduce spending in this area.

Understand where you spend the most and try to make small incremental changes to reduce expenses in that particular area. Say for instance you spend a lot of money eating outside every month. You should focus your efforts on minimizing eating outside. You can cut down on eating outside by making simple changes such as taking lunch from home instead of eating out at work. This would not only be cheaper but it will also be healthy rather than eating outside every day. I will strongly encourage setting up small incremental goals to save expenses instead of making drastic changes. I have learnt from personal experience that making drastic changes is difficult to achieve and you tend to lose interest quickly. Instead making small incremental changes is sustainable and will help achieve your goals.

There are several other automated tools out there to track your expenses. Some popular tools are listed below.

You can find more details on these tools in this blog post – https://www.thebalance.com/best-expense-tracker-apps-4158958

In conclusion, it’s important to understand your net worth and your monthly expenses to understand your financial health. Tracking these metrics will help you understand your financial situation and identify areas to focus your efforts to minimize unnecessary expenses and increase your savings which will in turn help you achieve financial freedom.

Please share your thoughts in the comments on how you track your expenses and what tools have you used. Also, share your thoughts on how tracking these metrics have helped you make better financial decisions.

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