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As you kick your financial planning into the next gear, the key to your success is building momentum. One of the best ways to build momentum is seeing the direct results of your efforts translate into higher numbers in your bank account.
Tracking just two numbers on a monthly basis will help you stay focused and more likely to achieve your goals. We cover them here.
Two Metrics You Need To Track
Total Net Worth
You probably have your 401k with one vendor, your student debt with a different company, and your checking and other stocks with yet another. If you haven’t already, you need to reduce the friction of getting a total net worth update by building a single picture of your holdings.
A command central aggregator will also be very useful when you find yourself doing drill down exercises. You will want to review the mix of stocks vs bonds vs other assets in your portfolio, and adding up the amount of each type by hand is tedious.
A single view into your spending across checks, credit cards, and cash is an essential check up on your financial health. You will be able to see trends (i..e. Has spending been growing month to month and how much) as well as be able to drill down to spot any problem patterns.
As an example from my own life, I had noticed that somehow we had let ourselves get to more than $1,000 a month on eating out. Many of us get the sense expenses are slowly creeping up, but without the ability to easily sift through looking for patterns, we just let the feeling slide instead of doing something to change it.
Because I had all my expenses hooked up to one central view, I was able to drill down to understand that one-the-go/takeout was a major culprit which wasn’t yielding much lasting enjoyment. By identifying that and a few other patterns, I was able to drop our eating out expenses from $1000 to $250 in two months. It’s been at that level ever since. That’s a $9,000 a year savings! All because there was an easy way for me to sift through my past purchases and compare them to past time periods.
How To Track These Metrics
We are fortunate to live in an age where technology can help us handle these needs. I’ve used several options and by far my favorite right now is Personal Capital, which is free.
Personal Capital links to all your accounts including 401ks, IRAs, brokerage accounts, checking accounts, and credit cards. Because of this, it allows you to track both of the metrics we have discussed: net worth and spending at any time. It pulls and stores line-level transaction data so you are able to do the kinds of drill-downs I describe above over months of historical data, and the UI and visual charts they provide are slick and intuitive to use for these drill-downs.
When you hook everything up, the platform also does a benchmark of your expense ratios to determine if you are overpaying for your funds. If you have a mutual fund kicking around in there that could be optimized for cost with a similar alternative, it will tell you.
You might wonder how these guys make money. The site offers its platform for free and monetizes by offering wealth management services. This usually comes in the form of an offer to walk through your portfolio with you, but you are free to decline and still keep using the platform.
Check them out and get a feel for how it would fit you over here. I hope it will be as helpful for you as it’s been for me.
Personal Capital is by no means the only software I’ve tried, and I want to highlight some other solid options from my software test drive.
Quicken: I used this as a backup to Personal Capital for a while. The interface is clunky compared to the online options and there is a lot of extra functionality that can make it confusing to navigate. If you want an option that sits on your local computer, though, this is still great. And if you are a power user with lots of complicated tracking requirements, this is probably still the most powerful product on the market with the ability to build more custom reports than any other service. As of the date of this post, the software costs anywhere between $39.95 and $109.95 depending on which package you choose. I recommend starting with something more lightweight first and moving to something like this only if you find that those lighter solutions don’t meet your needs.
Mint: I have tried Mint as it is also backed by a great company (Intuit, makers of Quicken). I’m less happy with its net worth visualizations. The default settings have a slew of auto alerts. While these can be changed, it was a jarring start. I also preferred the tilt Personal Capital had towards net worth and investment portfolio tracking capabilities. It does still have an overall clean UI and it has other spending-based functionality such as budgeting for specific projects which is neat.
YNAB: If you need an extra boost when it comes to being strict about your spending, You Need A Budget is a nice solution. The thing that sets this apart from other solutions is that it asks you to manually enter each expense as a way to be mindful of your purchases. Its functionality is really built mostly around spending, though, so you’ll have to find another provider to track net worth to the degree it deserves. The product costs $50/yr.
With data readily available at your fingertips, you will be much more nimble in making productive changes to your life.
In the coming two weeks we will be doing a mini series on understanding different investment options and how to allocate your portfolio, so be sure to have something set up by then!