Keep track of your financial progress

You must keep track of your finances so you can know where you are in your journey to financial independence.

What should I keep track?
Investors in publicly listed company uses the financial statements will indicate a company's financial position and progress from previous years. Similarly, we need to keep track of our financial statements. There are three parts to your financial statements: The income statement, the balance sheet, and the statement of cash flow.

1. Income statement - Your income and expenses.
You should track every transaction - every dollar and cent of your income (job, business, and investments) and expenses (living expenses, taxes, and debt service). By tracking your income and expenses, you will become conscious of where your money came from and where they went to. Unless you are aware of problems with how much money you are spending and how little money you are investing, you cannot fix them.

2. Balance sheet - Your assets, liabilities, and equities (net worth).
You should track every asset and liability that you have - bank accounts, retirement accounts, investments, mortgages, credit cards, auto loans, consumer loans. Your balance sheet will show you your financial position at a point in time, but you will only find out your net worth (the commonly used term for an individual's equity) if you take the time to prepare your balance sheet. While net worth is not a perfect measurement for wealth, it is a good starting point.

3. Statement of cash flow - Your cash flow.
You should track cash flow from investing activities, such as the purchase and sale of investments (bonds, stocks, real estate), and cash flow from financing activities, such as the borrowing or repayment of debts. The statement of cash flow will act as a check on the income statement and balance sheet. It will tell you where your net income went to (e.g. how much to cash savings, how much to retirement fund, how much to your other investments) and how your balance sheet has changed (e.g. cash from bank account invested into stocks, or sale of bonds increased cash in bank account).

How do I keep track of my financial progress?
1. Keep all your financial data in one location.
In my first post on minimizing expenses, I recommended using personal finance softwares to keep track of your income and expenses. Using a software will reduce a lot of work in generating your financial statements. You can use an Excel spreadsheet or paper-and-pen to keep accounts and still be able to generate financial statements, but you will need to put in more hard work later.

Whichever account keeping system you decide to use, keep all your financial data there. Do not keep some data in Quicken, some in Excel, and some on paper - it will be a nightmare to gather all the data and produce a consolidated income statement, balance sheet, and statement of cash flow. For paper records, such as tax returns and bank statements, you should also keep them in one location (a folder, a drawer, or a filing cabinet). Don't make things difficult for yourself by spreading your financial data everywhere.

2. Process your transactions daily
It is important that you get into the habit of processing your transactions daily - it will only take a few minutes of your day. At a minimum, process your transaction weekly - but processing weekly will probably take you 30 minutes to an hour (or more) to complete the task. If you wait for any longer, it may become such an overwhelming task that you stop doing keeping track and, possibly, start losing control of your finances.

Ask for receipts with every transaction. At the end of each day, process your transactions and reconcile your wallet cash balance. In my experience, you will inevitably have a few receipt-less cash transactions, and you will forget them if you don't process your transactions and reconcile your wallet cash balances daily. I am very meticulous in my account keeping and cringe whenever I have to enter a "miscellaneous" expense to reconcile my accounts to my wallet cash balance. While the loss of transaction data do not represent a loss of money, I prefer to have complete, detailed data so I can analyze and understand my financial performance.

3. Review your financial position regularly
Every month: Reconcile your bank account cash balances and credit card balances as the statements arrive. Review your month-by-month income statement. How much are your income and expenses this month? How do they compare to previous months? What is your net income (or deficit)? Where did you spend your money? How does it compare to your budget (or spending plan)? Are there any areas where can you reduce your expenses? What is your budget for the next month?

Every quarter: Review your month-by-month income statement. How have your income and expenses changed over the past 3 months? How do they compare to previous quarters? How do they compare to your budget? Are there any areas where can you reduce your expenses? What is your budget for the next 3 months?

Every year: Update the value of your assets and liabilities. Generate your financial statements - income statement, balance sheet, and statement of cash flow.

Income statement: How have your income and expenses changed over the past year? How do they compare to previous years? How do they compare to your budget? Are there any areas where can you reduce your expenses? What is your budget for the next year?

Balance sheet: How have your assets and liabilities changed over the past year? How do they compare to previous years? Did you increase your assets and decrease your liabilities? (An indicator that you are moving in the right direction.) Or did you decrease your assets and increase your liabilities? (A warning signal that you need to make changes!)

Statement of cash flow: The statement of cash flow is used to double-check and make sure that your income statement and changes to your balance sheet are correct. How has your net income (or deficit) affected your assets and liabilities? How have your assets values been changed because of unrealized gains or losses on investments? Do the change in your liabilities correspond to your borrowings or repayments of debt?

Tips on keeping track of your personal finances

• Simplify your finances.
• Consolidate your bank accounts as much as possible, close those that you don't use.
• Keep only one or two credit cards - cancel the rest of your credit cards (as soon as you've eliminated your credit card debt).
• Always ask for receipts. If no receipt is provided, write it down as soon as possible and keep the note with your receipts. Process them daily.
• When making transactions over the internet, enter the data into your account keeping system immediately.
• Schedule and automate regular transactions. Quicken has a "scheduled transaction" featured that will remind you to enter regular transactions as the scheduled dates approach.
• If your use software support it, download your bank account and credit card statements from your banks and import them into your software. It will reduce time you need to reconcile your balances. Reconciling your statements line-by-line is possible, it just takes more time.

Related posts:

• Minimize expenses.
• Preparing your financial statements.
• Analyzing your financial statements.
  
• How are you performing financially?
  

## This post is part of "The Principles of Wealth Accumulation" series on this blog.

P.S. This post was featured in the 148th Edition of the Carnival of Personal Finance at Gather Little by Little.