You are at the start of a journey toward financial freedom. As you begin you should find yourself reflecting a lot.
Thoughts like, “Holy shit. I can’t believe I spent $90 each week on retail therapy.” or “No way… I’ve spent $1,500 in the last two months on car stuff -- insurance, gas, loans, mechanic work, etc.” will probably come up often.
But you have to reflect. You have to find where your money is leaking to. And you have to feel it.
When I first did this I couldn’t stop shaking my head in disbelief. I literally said things like,
“I have a negative savings ratio… And it’s been that way for 21 of the last 23 months!??”
“I spent over $5,000 servicing my Nissan Xterra last year. And it’s getting me 16 miles to the gallon!?”
As I felt each of these occurrences surface, I decided it was time to take control. So what did I do? I created my first spreadsheet titled, “Alright, you’re fucked.”
Looking back, I laugh now. But I really felt it then. It was scary. I reflected and saw that money had control of my future. It had control of my freedom.
I didn’t brush that realization to the side. I hung on to it. And I simply switched a few things in my life. All of which have been awesome.
Now I have control of my money. I have control of my future freedom. And it is so damn exciting!
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Once you reflect upon your past spending, you can re-direct the movement of your money to create the life you’ve always wanted. For me this is a life designed for endless adventures, open ended time with family and friends, enjoyment of the comforts of civilization, and engagement in the things I love.
So expect to feel your stomach flip when you view your net income. Sit with it for a while. Then decide to make a change. And slowly you’ll start to see things move into the green. You’ll start to feel the freedom become reality.
If you empower yourself with this knowledge, you will own your choices.
If you don’t, you will continue slipping into the stagnant, muddy stream of the working dead. You will wake up with the stresses of making rent or the worries of hitting a deadline for an on-going job.
If you don’t, your job will own your choices.
Here’s how to get started: Reflect via these five actions in your mint.com account for 15 minutes every Sunday morning.
The screenshots I used below are from the three months before and after I started. Hopefully this gives you a picture of what your charts will grow to look like.
1. Categorize your transactions.
To start I click on Transactions in the top menu bar. Find your last mis-categorized transaction. Then choose the payment's most relevant category and subcategory. Do this till you reach your most recent payment.
Mint.com makes this easy. They provide you with pre-set categories and subcategories that work. And they auto-categorize your transactions. I've found that the auto-categorization gets about 60% of my transactions right every time.
Though sometimes I want to track my spending on a subcategory that doesn't exist. That's not a problem as you can simply create a new subcategory. One I recently created is Kiteboarding. To do this I looked through my categories and found that Health & Fitness is the best category for it to fit under. Then I clicked, Add/Edit Categories (above). Now I can see how much I spend on a new found passion.
There are times where mint.com will continually mis-categorize a recurring transaction. When this happens I set a rule that tells mint.com to always categorize transactions from that merchant under the correct subcategory. Then all future transactions are auto-categorized to that correct subcategory.
There's also times when I purchase groceries for my two other housemates. We need to split the $28.70 transaction three ways. And I don't want the $28.70 to show up in my spending, since I'm not really spending that money. To keep the extra $19.12 from showing in my spending I first split the transaction.
Then after my housemates pay me back, I categorize their $9.56 transactions as duplicates. This takes the $19.12 out of my spending.
If one of them pays me back by buying me a 6-pack I do not duplicate their transaction. Because at that point I have used the $9.56 for the 6-pack. I like getting money instead of these trades. It’s the same amount for my friend. And then I have the choice for how to use that money. I can purchase the 6-pack if I want. Or I can simply transfer $19.12 to my savings and add it to my freedom stash.
By splitting and duplicating transactions like this I am able to track my spending. My spending is not inflated by paying an entire bill for the house or paying the check on a dinner for a group of friends. This ensures that your savings ratio relates to your spending.
2. Check the balance of your accounts.
Next I click Overview on the top menu bar. There I view the balances of all my accounts.
To start your goal should be to drop any loan balances to zero. Seriously do this as fast as possible. Loans compound over time. This means they grow exponentially deeper into the red. Loans will keep a job owning your choices for a lifetime. Put this fire out.
Once there your next step is to get 4 months of living expenses in your savings account. This will be your first feeling of freedom. This is your first safety net. If a job goes away this allows you to not feel forced to take the first job that’s offered to you. Or if you get critically injured this gives you four months of time to heal.
The next step here is investing. But we’re keeping things simple for now. Muster the gumption from your savings ratio. Knock the above out first!
3. Check your net income.
From there I click into Trends. And I click right into Net Income.
Net Income is your most important trend. Net income shows the amount of money you saved or lost each month. This is your income minus your spending.
The green bar shows your income amount. The red bar shows your spending amount. And the black dot shows how much money you saved or lost each month.
Your goal here is to keep the black dot (the money you saved) well into the green. As you go the black line should look flat in the green. And when you get a raise you should see the black line raise with it.
Make sure to keep your net income accurate by using the split and duplicate features I mentioned above. Another way I might use these features is for paying back a loan.
Payments on a loan are purchasing freedom. This is money I am using to fill the hole that is currently my savings. If I didn’t have the loan, I’d put that money into my savings account. Therefore these payments should not reflect in my monthly spending. So instead I would duplicate these loan payments. This will now show me that I’m still hitting my 50% savings ratio each month. And that’s something to celebrate!
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Your goal here is for your net income to match the savings ratio of your choice every month.
I like to view the last 3, 6, 12 months and All Time perspectives of my net income. These give me a great long-term picture of how I’m doing. Keep that black dot up in the green!
4. Check your net worth.
From there I clicked into Net Worth. Net Worth shows me the balance of all my accounts. This is the sum of all the money you have in cash (savings and checking accounts), Credit Cards, Loans, Investments and Property.
The green or red bars show the balance of all your accounts at the end of each month. Your starting goal here is for the bars to grow linearly up and to the right.
To keep my net worth accurate I add assets to my Property account. This could be things like a security deposit or a car. You can add assets by clicking the pencil and paper icon at the top right of your accounts on the Overview page.
Then click Other and Add Other Property.
If the asset you add depreciates (like a car), you should add the value you’d realistically get at a time you may intend to sell it. For example, I bought my moped for $2,000 last year. At that time I didn’t expect myself to sell the moped for at least three years. So I added the moped to my Property account at $1,200 -- the realistic value it’d be worth three years down the road.
Never overvalue your assets (your property). If you ever need to convert an asset to money (selling the property), you do not want to be surprised with less money than you expected. Especially if you had plans to use that money to purchase something else, like a new security deposit after a move or a down payment on a mortgage.
5. Check your spending.
Lastly, I click over to Spending. And I select By Category. Here I view where my money is going to. I shouldn’t have any surprises.
For me, I know how much to expect will be spent on rent, utilities, food, and fun each month. If any of those balances look out of wack, I hover over the category and click the Transactions link at the bottom of the modal (above).
This shows me everything I purchased under that category during the selected time period.
Sometimes I find I need to re-categorize a transaction or two. Other times I find I need to change the date of a payment to the previous month. This happens when I pay rent twice in one month -- like on June 1st for June’s rent and June 30th for July’s rent. When this happens I change the date of the June 1st payment to May 30th by clicking the date in the transaction line. Then I see the spending for both months re-balance.
When I started honing these five steps I had been reflecting on my mint.com account pretty much daily. Today 2 years later I check it once every week or two. Now I’m mostly doing good work at my job, enjoying the sports and hobbies I love, and spending time really listening and really sharing with my friends and family. The need to think about money slowly fades away.
You’re going to get there too! And here’s how:
Go dial in your mint.com account. Like now. And start reflecting on your financial journal (mint.com) each week using the five steps above. If you really listen to it -- if you really feel what it’s telling you -- you’ll move it to the green.
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Keep reading. You won't regret it.