This article was originally published by Lorri DeFoor at sustain-financial.com
No matter where you on your financial path, a foundational idea in all financial planning is to have check-in metrics that you use to periodically measure how you are progressing towards goals. A consistent metric allows you to celebrate achievements over time and identify potential areas for improvement. The two I recommend everyone start with are a way to track cash flow and the creation of a net worth statement. One without the other may result in a misleading picture of your finances or limit your thinking about long term financial goals—which should incorporate shifts and changes in both, according to what’s important to you.
Net Worth
A net worth statement is like a single point-in-time snapshot of your financial situation. It tells you nothing about how money flows on a monthly or yearly basis. It doesn’t require constant tracking, so although you may choose to do it more often, simply creating an annual net worth statement is often a good place to start. It is also an essential tracking tool for lifetime financial progress.
A net worth statement is a statement of the value of what you own minus the value of what you owe. What you own includes checking and savings accounts, other investments, and retirement accounts. It also includes “use assets” like your home or car. Typically, in order to minimize how many “use assets” need to be recorded, I encourage folks to focus only on recording use assets over a certain dollar amount. Focus on big-ticket items like homes and cars, and don’t get bogged down trying to put a dollar value on everything you own.
A net worth statement can be both a powerful tracking tool over the course of a lifetime, as well as a powerful motivator. When cash flow feels tight because you are diverting more money into debt payoff, retirement accounts, or perhaps you just purchased a home, it can be motivating to see the growth in your net worth that these choices are providing for.
Cash Flow
Put simply, cash flow is a statement of what you earn minus what you spend for a given period of time. It tracks how money is moving in and out of your life over time, rather than how money is accumulating. For many people who struggle to track finances, tracking cash flow is a major pain point, but it’s essential to understand your cash flow if you hope to make educated financial decisions and set reasonable goals.
Tracking cash flow is typically done monthly because that time frame lines up with the way most people get paid and pay their bills. However, for anyone manually tracking their cash flow and trying to get a sense of what and how they are spending, I would encourage at least a weekly check-in to review and categorize expenses. Otherwise, it can become overwhelming at the end of the month to go back and look at what you’ve spent and categorize it. Additionally, the more often you check-in with yourself about money, the more awareness you are forced to bring to your spending, which for many is enough to interrupt at least some of our unintentional spending habits. I typically find that the more regularly the check-in occurs (for example, spending 5 minutes at the end of each day reviewing and recording expenses) the more likely it is that the cash flow record will be accurate and that a month of unusually high spending might be caught and modified before it ever occurs.
Getting a handle on cash flow can be challenging. It takes time and regular attention to money coming in and money going out. It forces you to look at where you are spending money, which can be uncomfortable for some people. It can also take longer than expected to get a good sense of cash flow. Though many of our expenses are experienced monthly, others (like car maintenance, vet bills, etc.) don’t materialize that often. So, I encourage folks to commit to at least a year of careful tracking to get a true sense of their cash flow. A month or two can be misleading because it often fails to capture the full breadth of one’s income and spending.
Methods for Tracking Cash Flow and Net Worth
Finding and committing to a clear method for tracking one’s net worth and cash flow isn’t easy, and different methods will work better for different people. I have clients who still do theirs by hand in a notebook because they enjoy the act of physically writing the numbers down, and they feel that this method brings the most intention and awareness to their finances. For others, I know that would feel overly burdensome. For those who don’t love the idea of hand-recording, a spreadsheet can be a great tool for tracking over time (The original version of this post can be found here, and has a downloadable template of a cash flow and net-worth tracking spreadsheet). I’ve also had some clients who have had good luck with apps, and others who disengage too much if the app is doing the work for them. There’s not one right way to do this; the important part is finding a way that consistently works for you.
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