When you’re just starting to manage your finances, it can be overwhelming to think about everything you “should be” keeping track of. Do you need to record every purchase, even if it’s just a gas station soda? Should you set up a stock alert for every investment in your 401(k)? How important is it to check your credit score?
Keeping track of every detail of your money can be exhausting. In fact, many people end up burning out on personal finance because they just get overwhelmed by all the stuff they’re “supposed” to know.
The thing is, you don’t need to know everything to manage your money well. It’s better to focus on a few key metrics, especially when you’re just starting out. Monitoring these specific areas gives you a clear picture of your financial situation.
Income and savings
A great place to start with your finances is looking at your income and savings.
- How much are you saving?
- What type of savings do you have (e.g. 401(k), emergency fund, 529 college savings account, etc.)?
Saving money is great, but it is possible to go overboard. Make sure the amount you are putting away every month is sustainable. You don’t want to risk missing payments or overdrafting your account because you’re allocating too much to savings. And you shouldn’t miss out on things that are important to you just because some online guru says you should be putting a certain percentage of your income away for a rainy day.
Run the numbers: Start with your income and subtract the money that’s going into savings each month so you know exactly how much you have left to work with.
What if you’re still paying off debt and saving just isn’t an option right now? That’s OK! You can still make progress on your money goals – you just need to focus on a different area. Start by calculating how much of your income is going toward debt payments: student loans, mortgage payments, car loans, credit card balances, and any other debt you may have.
At first, this task can feel scary or depressing, especially if you have a lot of debt. But the point is not to make yourself feel guilty or ashamed of your debt. It’s to show you exactly where your money is going and allow you to see the progress you’re making.
Remember, every payment you make toward your debt increases your net worth!
Once you’ve noted your income and the amount you’re putting toward savings and/or debt, it’s time to look at the rest of your spending. How much money goes out of your accounts each month?
As with debt, the point of looking at your spending isn’t to judge yourself or determine if you’re “failing.” The goal of this exercise is simply to get a clear, realistic picture of how much money is going out each month. Once you have this information, you can decide what to do with it.
Maybe you notice that your monthly spending aligns fairly well with your income and other financial responsibilities. If so, great! You can just keep chugging along with your current spending habits.
Or maybe you realize that you’d feel more comfortable spending a little less each month. That’s great too! Because you’ve done the work to find out exactly where your money is going, you can make changes so your spending lines up with your values and priorities.
Net worth progress
The next part of your finances to look at is your net worth. Despite its somewhat elitist connotation, this metric isn’t just for Bill Gates and other members of the billionaires club. Everyone has a net worth – it’s simply the value of your assets minus the value of your liabilities.
If you’re just starting out, your net worth may be small. It might even be negative (i.e. more liabilities than assets), but there’s nothing wrong with that. It’s simply a picture of where you are financially right now.
No matter what your starting net worth is, you can make it grow. Paying off debt increases your net worth. If your home appreciates in value, that increases your net worth. Even adding $5 every month to your retirement increases your net worth. Figure out your starting point, and then check in with your net worth each year so you can see how much it has grown.
The last vital metric to track is results. How are your saving and spending habits working for you? Are you seeing progress toward the goals that are important to you?
You can track progress in several areas. For example, you can see how quickly you’re moving toward your savings goal (if you have one). Or you can look at the returns on any investments you have to see how they’re doing. You can determine how much inflation is affecting things. If you have a high-yield savings account or certificates of deposit, you can monitor their rates to see if there are better places to put your money.
If the financial actions you’re taking right now aren’t working well, you can make adjustments.
Tracking your finances: start small
There are countless pieces of your finances that you could track and manage, but trying to keep on top of everything can be overwhelming. Fortunately, you don’t need to know everything to manage your money well. Start by focusing on the essential metrics: income, savings, debt, and net worth. When you’re monitoring these key areas, you can know whether you’re making progress toward your financial goals.
Keeping a budget is a great way to track your money. If you aren’t budgeting yet (or don’t like the system you’re using now), take a new approach with BudgetingBlocks™. Physical blocks make it easy to visualize your money so you and your partner can easily decide how you want to allocate it. Forget complicated, boring spreadsheets, and try this simple and fun system instead.