This is the thirteenth part of Money360 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:
After several months, the chart will eventually grow into something like this:
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.