If you read a lot of personal finance books or listen to personal finance podcasts, you will find a common theme among them about how most people got started – tracking income and expenses.
Tracking income and expenses is the starting point to all financial journeys because if you know what your income is and what your expenses are, you will know how to make adjustments so that there is more coming in than going out. Celebrities, athletes, and rappers go broke when they don’t track!
I believe this is the common mistake that most people make when it comes to personal finance. They simply do not know where their money is going.
It is a simple concept but it is fundamental and often overlooked. It is one of the guiding principles in the popular personal finance book The Richest Man in Babylon.
The main teacher started out poor and explains how he became the richest man in Babylon. He uses the basic example of tracking eggs for one of the principles:
If thou select one of thy baskets and put into each morning ten eggs and take out from it each evening nine eggs, what will eventually happen?
It will come in time overflowing
Spending less than one earns is the time tested strategy to start anyone off in the direction of accumulating wealth. Tracking income and expenses is what the experts use and refer to as the Statement of Cash Flows.
Example
The most common cash inflows that someone would receive is money from a W-2 job, where you trade time for money:
Monthly Income
| Job | $5,000 |
Income is considered the top line or revenue and it is then deducted by the most common cash outflows:
Monthly Expenses
| Rent/Mortgage | $1,500 |
| Taxes | $1,250 |
| Food | $750 |
| Transportation | $400 |
| Utilities/Internet/Cable | $300 |
| Cell Phone | $100 |
| Miscellaneous | $200 |
| Total | $4,500 |
In this example we would take monthly income and subtract monthly expenses:
$5,000 – $4,500 = $500
There would be a surplus of $500 per month that the person could save or invest in the future. By tracking income and expenses you can see if you are trending in the right direction and adjust accordingly.
Even if you are losing money each month, just knowing will turn a light switch on and bring you to the realization that changes need to be made. Unfortunately, credit cards and financing options in today’s world make it all too easy to slide into debt without knowing.
Conclusion
Tracking income and expenses is a good way to get started in your personal financial journey. People that live paycheck to paycheck will likely not know what is coming in and going out and people that are accumulating wealth will likely know where their money is going. They will also likely know their net worth.
Getting started is as easy as writing down on paper what you make and then deducting what you spend each month. Excel has plenty of templates for tracking and budgeting, and there are also many apps and websites that will be of great service depending on your needs.
