Last week I made the point that having control of your finances is good for virtually everyone, and we have gone through a few common excuses people give not to take care of their financial life. This post is its sequence, and the idea here is to drill down into the benefits of better financial control.
Oversight – Knowing what your key numbers are
The first meaningful benefit that you can draw from checking all of your finances – for some people this will mean assembling different currencies, for others it will be discounting debts from the assets – is to have a real oversight and know over which financial reality you stand.
If you have been consistently careful dealing with money over the years and make a point out of saving money regularly, you probably will have some savings accumulated, either in the form of a bank deposit or other financial or non-financial assets. It does make a huge difference, however, if your savings correspond to one month worth of your salary, one year worth of your expenses or, if you are really good at saving, 10 years worth of either of them.
When checking how much I had saved in my early career, I was at times surprised by how much my savings amounted – sometimes it was more and sometimes it was less than I expected – and this was mostly due to the fact I saved and checked very irregularly at that time. While it is a fortunate surprise to realise you have more savings than expected, I would definitely try to avoid the opposite situation, it’s very disappointing to find out you have less savings and assets than you thought you did, and the only good coming out of it is an increased drive to save more. The best remedy in any case is to keep a regular oversight over your finances, know how much you actually have in your currency of choice.
Trends – How are the finances evolving over time?
Once you have a good static overview of what you have, and look at it regularly, very much the same way as a collection of subsequent pictures coming on top of each other, you start to see a motion picture forming, which allows you to see how your finances came to be at the current stand, and possibly where they are heading.
Now, both your finances in general and the specific trends you observe might be more or less obvious and expected given the moment you are in your life, but for many the trends in actual numbers can be surprising over the years. To describe varied situations in more detail, it is helpful to look at the components of your finances, namely the expenses and income sides of the equation, to then move on to your net position.
Expenses – Meaningful changes and their impact
Often the most flexible part of your finances – especially if you are employed – is the sum of your expenses. Sometimes you will have a yearly payment to make, like a long holiday or your taxes, and some periods just have less expenses than others, so it’s normal to see the ever-changing numbers. Now, if you set aside the irregular payments and manage to see an actual trend on your finances – either an increase or decrease in spending through averaging of a longer series – the evolution is fundamentally important for your finances, and you should ask yourself how sustainable the trend is.
Surely spending less than before is less concerning than the reverse, but you also should avoid artificially reducing your spending for a given period (for instance, postponing paying something you owe anyhow) and consider the expenses when they occur rather than when you choose to pay them, simply to have the most honest picture of what your lifestyle costs. On the flip side, if your expenses increased, try to figure out whether you experience a temporary increase – I for one experienced that a few months before I had my first child – or if you might have reached a higher expense pattern, in which case making sure you can afford it is key to either adjust into that new spending reality, or to actively cut back on expenses and bring them back to a comfortable level.
Income – My available cash after a job change
Another fundamental aspect of your finances is how much is money is coming in, namely your income. Now, for those who rely on regular employment, you might think there isn’t too much to manage when what you get is somehow given, but you should also consider income from investments – even though in Europe nowadays interests are very low, you should still have your savings generating income for you – and also extras such as bonuses, freelance work, presents etc.
When thinking of income, it’s also very important to consider taxes, so your gross salary number is less relevant than what you actually see coming into your bank account. Similarly, a job change might impact your income significantly, and going one step further into the analysis you can discount what you already know you will spend out of it and find out in amounts how the new income affects your cash availability going forward. In this sense, a relatively small percentual increase in your income – should you be able to maintain your expenses – can mean a much higher percentage increase of your available cash, which gives you a healthy option to either spend or save and invest more.
Savings / Assets – How are my net assets evolving?
Having looked at the main components of your finances, you can then go full circle and notice the overall trend regarding your assets and debts. Make sure to fully appreciate the detail regarding income and expenditure’s evolution over time, rather than just looking at the bottom-line. You can also find plenty of advice out there to change a specific situation such as getting out of debt, so consider your specific situation to realistically get where you want to be.
For example, an apparently stable portfolio of assets over a couple of years might hide an increase in both income and expenses in the same period. In case the income increased independently of the expenditure, this could have been a great opportunity to save more, while if an inevitable surge in expenses was actually matched by an income increase, you might have been lucky with timings.
One final point about one’s finances evolving over time is that for many the total household numbers are more relevant than the personal finances, which is absolutely common and doesn’t change the benefits nor difficulties concerning the analysis. Maybe there is scope to discuss doing finances together or separately in another post, but for now consider either yourself or your household and jump into your finances!
Portfolio enhancement and beyond
One tangent of your financial analysis worth highlighting – actually my favourite part – is the chance you get to continuously review your portfolio. In a first glance, your finances are nothing but numbers, and even the golden number of how much I have saved can seem dull if you don’t plan to do anything with those resources.
Once you make a conscious effort to save, however, it not only makes sense to monitor how the savings themselves are evolving, but it also becomes obvious that how well you invest makes an enormous difference for your financial future. Investing more and better is one of my most important long-term goals, and I have been working hard to get more people aware of how much they can gain from a simple mindset adjustment towards caring for their finances. Please note that investing better implies the possibility of continuous enhancement, so whereas in your early financial education there are actual rights and wrongs, the more you learn about finances and the more you notice the finance world is complex and you choose the most appropriate risks rather than get tested for correct responses.
In this same direction, while for some the drive to invest comes more naturally, I personally only started to worry about investing more wisely once I noticed that the alternative – keeping my funds saved without a decent remuneration – was a poor choice with serious consequences accumulating over time. So if you take nothing else from this post, think of how you want your finances to look further than the next 5 years, focus rather on the next 20-30 years, and with that in mind you can make the right decisions and focus your attention where it makes the most difference.
Finally, I advocate that conquering the hability to plan your financial life and earn some tranquility is a desirable position we all should work towards. Our suggestions to get there involve being well versed on your financial numbers, knowing how each variable impacts the other aspects of your finances, and ultimately taking control over where your finances are heading.