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In the first video we introduced some basicconcepts to help you understand how your money works.
If you haven’t seen it, click thelink in the description below.
This time we are going to focus on an importantpart of personal finance and the first step on your road to wealth – keeping track ofyour finances.
Before you begin, you need to decide how you are going to track your money from now on.
There are three principal ways you can do this.
Keep a paper-based record book.
This is the most traditional way to keep track ofyour finances.
On the plus side it means you only have to open the book – wherever youare – to see how you are doing and it is quick and easy to get started.
On the downside,you won’t be able to do any fancy formulas, graphs and the like and it does take the mosttime to keep updated.
Subscribe to an accounts package.
Thereare many personal accounting software applications available so you can probably find one thatfits your needs.
However, some can be a bit inflexible and most of the good ones havean up-front or subscription charge.
Do it in a spreadsheet.
This is my favouritemethod because it is fast to keep updated, allows me endless ways to customise and reporton my activity and best of all it is free.
Have a go at creating your own, or if youare not as enthusiastic as me at building tables and formulas, I have created my owntemplate for you to use that also conforms to the terminology and methodology used onthis channel.
More details on how to get this template (for a modest fee) are availableat the end of the video or in the description below.
There are two aspects to tracking you finances; logging and categorising; and reporting.
Thefirst part is very straightforward.
For every transaction you make, log the date, description,amount, balance and then enter a category.
We will discuss categories a bit later inthe video.
Once you start logging, it is important toensure you don’t miss anything out.
Pretty much every online banking facility allowsyou to download your transactions into a handy file – like a spreadsheet.
This saves alot of typing as you can just copy and paste the records into your spreadsheet and thenyou only have to do the categories.
I use a month as a reporting period as thisis how often most people get paid and pay their bills.
I usually update my records afew times a month which gives me the right balance, ensuring my spreadsheet is up todate without creating a lot of work.
CategoriesIt is vital that each transaction in your list is categorised so you can understandwhere you are spending your money.
You can make this as simple or as complex as you likedepending on what level of detail you want.
We will go over some suggestions now thatI consider to be the minimum to give you the right level of information and it’s a greatplace to start.
IncomeIncome is easy to categorise as there are only a few different types.
• Earned Income is any money you have earned through traditional means such as a salary.
• Passive income is money you have received from assets such as rent from property, dividendsfrom shares, royalties from intellectual property, interest on savings, etc.
• Sales income is money received from the sale of goods or services you have producedor offered.
This is not quite the same as earned or passive income as your time andeffort went in and you have to repeat the process to earn more.
• Other income can be used for minor things like child benefit, gifts, etc.
Expenses are – sadly – much more commonon your financial statement than income so it is important have good categories.
Enoughthat you can break down your outgoings but not do detailed than everything ends up inits’ own category.
• Fixed Bills covers everything that goesout by direct debit and where the amounts don’t change by much.
It is used for billsthat you can’t easily or quickly get rid of.
This means mortgage payments, utilitybills, council tax, loan repayments, interest free credit, car leases, insurance, etc.
• Variable bills can also apply to direct debits but use this where the amounts canvary.
Items in this category will be things you could cut-back on if times were tight.
Variable bills can cover bank charges, food shopping, petrol, credit card payments, etc.
• Investing refers to anything spent on asset or where you expect a return.
• Saving is money put into a savings account.
Whilst it is technically an investment, thefunds are usually available much more readily and it is good to keep it separate.
• Education covers investment in education and personal development.
Personal developmentis often shunned and people see their education finishing when they leave school or Uni.
This only guarantees your knowledge remains stagnant.
This topic is so important there will be a whole video dedicated to it in the future.
• Charity covers donations to charity.
Charityis a personal choice of course but I highly recommend regularly donating to some worthwhilecauses.
What is the point in being wealthy if you can’t help others? I budget 5% ofmy income for each of these categories.
• Luxuries refers to anything you spendthat is not covered above – in other words, liabilities! These are things that you coulderadicate from your expenditure if your life depended on it.
This includes eating out,gifts for family and friends, days out, holidays, clothes, furniture, decorations, and anythingelse you can think of.
These expense categories can be broadly summedup as; living expenses, investing and luxuries.
Most people are surprised how much of theirmonthly income goes on luxuries when they sit down and work it out.
All you have to do, to set yourself on the course to wealth, is divert some of your spendingon luxuries into investing instead.
It really is that simple.
Unfortunately, this is seenas boring and it takes too long to see the results.
Today’s society is all about instantgratification, buy it now, interest free credit, pay day loans and other mechanisms that distractpeople from long-term goals.
ReportingReporting on your finances can be a bit trickier if you are not sure what to look for.
I findit best to analyse my income and expenditure in the above categories monthly.
When youstart tracking you will probably see a lot of variation between months – particularlyin the somewhat unpredictable luxuries category.
After a few months of tracking you shouldbe able to identify any trends or areas where you are wasting money.
At this point it ishighly recommended you create a budget.
This will help you understand how much you areallowed to spend on luxuries and can guide your financial strategy.
Budgeting is coveredin more detail in another video.
There are endless ways you can report on yourfinances and more advanced metrics and ratios will be covered in future.
To start with,it is vital you understand your cashflow; this is the net spend for the month as discussedin part 1.
You should aim to finish each month with a reasonable amount remaining that youcan then save or invest.
This is an obvious statement but millions of people set out withthis intention every pay day, only to end up with a deficit.
The first step to rectifyingthis is to understand your cashflow and stick to your budget.
It sounds simple, and it is,but it’s also easy to do it wrong – especially if you don’t have control over your finances.
If you’re still a bit lost or would liketo see this method put into practice, check out this tutorial video for the template Imentioned earlier.
You can watch the video without buying the template so it might giveyou some ideas.
And, if you decide you want to buy the template to get you started quicker, that’s ok too.