financial review

Financial review – How do I do it?

Every month, I conduct a financial review for myself. I go through what I spent in the last month, making sure that I recognize all transactions and categorize them into different sections. From there I plan my spending for the next month, and have a better forecast for my finance over the next year or so.

Tl; dr;

The steps that I go through (should take less than an hour to do)

  • List out all bank transactions
  • List out all credit card transactions
  • Put the transactions into several categories.
  • Put the final numbers into a spreadsheet.
  • Split the income into the same categories, and move them to corresponding bank accounts.
  • (Quarterly) Review investment portfolio.

You can’t control what you can’t measure

If you aim to achieve financial freedom one day, you need to control your finances. And the only way to control it is to measure what you have done over a period of time. I get paid monthly, so that’s why I do this once a month. I encourage you to do it in conjunction with your pay day.

It is even more important to me because I one day will work full time for my own company, and at the beginning, my income will drop significantly to keep the funding inside the company for growth. That’s why I do need to know how much my expenses are; and from there determine how much I need to take out of my company for living.

I begin the financial review with listing out all bank transactions within the last month in a text document. You don’t need to have the bank statement, just transactions history is fine. Don’t forget your credit card transactions as well. I myself have quite a few bank accounts, so pulling all of them together requires me to log into each and everyone of them at least once a month. I just copy and paste them into a text document. Below is an example.

bank transactions
Bank transactions
transaction text
Transaction list

If you do this step, you’re probably ahead of many many people in terms of financial control. At least you have a rough look at what you spent over a period of time. Therefore it triggers something in your mind, and every change begins with the mind.

Categorize transactions

So, when you have a list of transactions, it’s time to put them into several categories. For me, I follow the Barefoot Investor categorization. You can read more about it in his book.

The categories are as follows:

  • Income: all your income sources (you can split it into salary, reimbursements, side income, etc. if needed)
  • Daily expense: all your necessary living expenses, e.g. food, electricity, gas, water, home loan mortgage payments, etc.
  • Splurge: all your optional expenses, e.g. eat out, TV/internet subscriptions, coffee, etc. Anything that you can live without, but choose not to.
  • Investment: all your investment expenses, e.g. putting money into stock market, purchase of something for work, charity donations, etc. Basically anything that potentially making you money, or at least can claim back on tax.

Note: I don’t count my investment income in this calculations, since I would like to reinvest all of them back into the market. So I keep them in an investment bank account, and only look at that once every 3 months.

The Excel spreadsheet for financial review will look similar to this. I also attach a sample file at the end of this section for you to try out. For people who can use accounting software, I’d recommend Akaunting because it’s free and should be enough for this.

Excel spreadsheet showing financial calculations
Sample Excel financial sheet

Here is the link to the sample document. Each month you just need to add another column to the right, and continue the calculations. Overtime, you can see what’s the average spending is; and from there, calculate your own financial plan. Every year I change to another sheet for clarity purposes.

Plan your expenses

Now you know how much you earn in the last period, it’s time to plan your expense for the next month.

Following The Richest Man In Babylon, I immediately pull 10% of total income into my investment account.

For the first time, I have no average number to plan my expenses, so I can only estimates how much do I spend for each categories. Your last expenses total is a good place to start. The average numbers should be around 6-12 months accumulations to be accurate, which means you need to adjust your plan every month until it becomes stable.

So let’s say your income is $3000.

  • 10% to investment ($300) – put this in a separate account, and review/plan it every quarter.
  • 30% to rent/mortgage ($900) – I split this because I need to measure whether I can move to another rental place, or move back into my own place. You can just put it together with the daily expense.
  • 30% to daily expense ($900) – You will have $900 to buy food and pay various necessary bills.
  • 30% to splurge ($900) – You have $900 to buy all the things you want to buy, no question asked.

The percentage will change based on your own spending habits. However, the aim is that no matter what you spend, at least 10% will need to go into investments for the future. Once the planning is done, move the money into each of their own bank accounts.

Congratulations, you have finished reviewing your financials for the month. In future posts, I’ll share my way of determining the expense a bit more accurately, so that you don’t trip on unexpected bills.

Summary

Financial review, in my mind, is what you must do, not what you want to do. It has to be done regularly so that you have a chance of having a better future. The hard part is doing this repeatedly over a long time. I have done this for almost 2 years now, and my numbers are getting better and better everyday.

By Tuan Nguyen

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