Your Money or Your Life: Seeing Progress

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YMOYLThis is the thirteenth part of The Simple Dollar Book Club reading of Your Money or Your Life. Want to know more?

The fifth chapter of this book focuses on creating a visual record of one’s income and expenses in the form of a line chart, so that one can keep clear tabs on the progress (or lack thereof). Although this chapter discusses how to do it with graph paper and pens, it’s pretty simple to do the same thing in a spreadsheet and just print off updates if you want to keep it in sight.

Actually preparing the graph is quite easy to do, and it’s something that I actually do. Each month, record exactly how much you earned and exactly how much you spend. Once you have two months’ worth of data, make a graph with the dollar amount on the left hand side and the months along the bottom. The end result will look something like this:

Chart 1

After several months, the chart will eventually grow into something like this:

Chart 2

So what’s interesting or useful about this graph?

First of all, the gap between spending and income is key. If your spending is higher than your income, then that’s debt and it’s an indication that things need to change. Your goal should generally be to maximize the difference between the spending and the income, with the income being higher – that gap is your savings, or the money you can use to build a future of freedom.

Second, it’s a great indicator of progress over time. This is essentially the same reason why I do my monthly personal finance reviews on here. Looking at progress over time lets you see that you’re doing good – each month worth of keeping that spending line below that savings line means an increase in your savings and an improvement in your overall financial state.

One aspect of this section that I liked (and noticed in my own life) was the idea of a “purge and splurge” cycle. During the first month of this, a person might notice that they’re spending more than they’re making, and this will scare them straight for a few months, in which they spend far less than they earn. After that, they’ll feel some relief and then splurge, going back to the same state they were in before. What’s the key to fighting this cycle? Keep the chart going. Even if the numbers you’re putting up for a month make you uncomfortable, it’s important to put them up there.

When I first read this, I really took it to heart and started keeping track of my spending and my earnings on a monthly basis. Eventually, I moved it to weekly and started just keeping track of my assets and debts, since I found that I was consistently showing a big gap between my earning and my spending and it was more important to me to see the gap between my assets and debts growing.

Tomorrow, we’ll finish up chapter five, “Seeing Progress,” starting from the heading “Getting Your Finances Out In The Open.” This section appears on pages 157 through 165 in my paperback version of the book.

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8 thoughts on “Your Money or Your Life: Seeing Progress

  1. Your example of a person making $60K and saving 20% into a 401K is doable. I did it with a family of 4 mouth to feed! Retired with a teenager still living at home. “Discipline is the fortitude to your financial success” is very true.

  2. Those charts (and the charts from Chapter 8) are the heart of the book for me.

    The book uses very simple examples, which are easy to follow and practically tailor made for a spreadsheet. But with a 401k, a HCSA, a 529, etc… it’s more work than I’d like to track everything.

    I use quicken for these charts. It’s less work that way, but big expenses (like taxes!) add noise to the system. (I suppose I could set up quicken to fund a “taxes” account monthly so the cost would be spread out over the year, but that’s too complicated for me.)

    (Not that I’m a shill for quicken, I’d happily use moneydance if it had all the features I need.)

  3. Nice illustration. I am so satisfied when I see my progress all these years reflected through this type of charts.

    I previously discussed about this topic and also give some suggestions to avoid the sudden dip in the income line.

  4. Great post! I agree, it is definitely very useful to track your progress and very interesting to see your spending pattern over time. This is the only way to maximize your saving and get control of your money, if you don’t know where your money goes then you don’t know where you can save that money.

  5. I liked this part of the book very much too. Funny thing is, I’ve kept track of every dollar I earn or spend for many years, about five years worth on the version of Quicken I’m using right now.

    Despite the record keeping, I was still deeply in debt. I looked at the numbers, but I didn’t really LOOK at the numbers. Somehow I thought that I was okay because I knew what was going on, but I didn’t take action. Now I’m tracking the numbers with a purpose in mind- to get out of debt. Now I feel the pain when I see the expense number go above the income.

  6. That’s exactly what you have to do with debt is get intense! We are doing our debt snowball and have paid off over 35K in debt since January – that’s above and beyond our regular house payments.

    It really does take intensity and a great sense of purpose to make serious progress on debt.

    We have a long way to go – but due to small successes, I can taste the day that I will be able to walk away from my job, if I want to, because I don’t have any payments.

    ~Oswegan
    http://oswegan.blogspot.com

  7. I love these graphs but mine look different than the examples.

    First, my income is mostly a straight line with a tiny incline once a year (most years). I don’t get spikes here. It doesn’t go up and down. There is nothing exciting or interesting about that line.

    Second, my spending is all over the place. There are certain large expenditures (and very large expenditures) that pop up infrequently such as car insurance and vacations. Also, I pay cash when I buy a car. It has no correlation whatsoever to my income.

    So, some months I look like a miser and some months I am spending way more than I earned (though not more than I’ve saved). So I like to add a line that’s the average of my last 12 months of spending so I can get a better handle on how my spending really does compare to my income.

    I agree with Trent that it’s important to include the data points you’re disappointed with. Later, when you’re doing well, or even mediocre, it will show you how far you’ve come.

    For those paying off debt, you might want to chart that, too. When I first bought my house I was making extra payments each month. I quite enjoyed plotting the line of how much I still owed and also plotting the line of how much I would be owing if I had just paid the minimum. Even when your numbers are huge and depressing, seeing that gigantic gap is very motivating. If you’re doing the debt snowball, you could make this easy by just plotting the numbers for the debt you’re throwing extra money at.

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