Throughout my career in the financial world, I've become acquainted with some seriously rich people. They work hard, and their net worth statement shows it. But there's one common denominator they all share: they track their wealth-building. When needed, they can quickly and easily pull together a snapshot of their financial health. Their net worth statement, outlining the values of their assets less anything owed, takes minutes to produce, not days.
And now, as a financial coach, I teach that same best practice. If you want to meet your financial goals and get rich, you need to track your finances. Here are four reasons why.
1. To stay organized
One of the most important reasons for tracking your finances is to help you get -- and stay -- organized. If you have a digital tracking system, you can attach receipts and other source documents right to the transactions.
Say you just purchased a home. With your financial tracking system, you can attach a copy of the purchase contract, closing statement, and deed right to the transaction itself. While it's a good idea to keep detailed records of all major purchases, this is also a great way to store information regarding the value of important assets. For example, knowing the property value of your new home based on comparable sales in your neighborhood is not only important for verification purposes but also if you ever decide to sell. Plus, the added benefits of time-saving and stress reduction from being organized can't be ignored. Time and health are just as valuable as money and adding to those adds to your wealth.
2. To monitor progress on goals
Making significant progress on your wealth-building means setting goals. And if you have goals, it's essential that your financial system tracks your progress toward meeting them. To make sure your spending is aligned with your goals, your system should allow you to enter your budget and at the end of each month, show you how your actual spending habits stack up.
Say you have a goal of saving $1,000 per month outside of your workplace retirement savings (you have a big trip planned, and you've determined that $25,000 is needed to make it special). Your financial tracking system not only keeps you accountable for saving but also ensures you're on pace to meet your goal in a timely fashion.
3. To aid in filing tax returns
A good financial tracking system can also help you prepare for filing your annual tax returns. For example, deductible expenses -- like donations, property taxes, and mortgage interest -- can quickly add up to substantial tax savings. But only if you track and report them accordingly. Or say you have a small gig on the side, the system can track your income and expenses, making the process of filing your taxes that much easier. And even if someone else prepares your returns, make sure you track all your expenses. You'd be surprised how many tax deductions get missed when you don't keep track of everything.
4. To facilitate working with a lender
For most significant purchases, lenders need a copy of prior tax returns and a personal net-worth statement. If you don't track your finances -- assets, liabilities, income, and expenses -- putting this statement together can be a real challenge. But if you've been tracking your finances regularly, the net worth statement should be easy to produce.
Tracking your finances and creating a net worth statement can even help you decide if you're ready to make a significant purchase, like buying a home. Lenders look to ensure you've got adequate funding sources for a down payment plus the ability to handle the resulting new mortgage payments. Before you even go to the bank, your tracking system can help you can see where that initial deposit might come from and evaluate how the new loan payment will fit into your current monthly budget. That personal review can give you the confidence that now is the right time for the purchase. Or, that maybe waiting a little longer is the correct answer.
How to get started
If you haven't been tracking your finances, the best place to start is with your current situation. List all your significant assets, like your house, car, bank accounts, and retirement accounts. Make another list of your debts, things like credit card balances, auto loans, and mortgages. Then, find an app that will let you record all your assets and liabilities and link all your accounts -- something like QuickBooks or Mint or Personal Capital. Automate as much as you can and by limiting cash transactions, you don't need to spend time entering data. Transactions can simply be downloaded from your bank and credit card accounts. You just have to make sure that they're in the right categories.
Additionally, prepare a budget and include it as part of your tracking. You can compare your actual spending figures to the budget. Analyzing your personal finance performance is more helpful and productive than spending that time entering transactions, so it's important to automate as much of the data entry as possible.
Follow these best practices and you can monitor your budget and work at increasing your net worth. Your goals and dreams will be realized more quickly. Then you'll understand why doing this one thing can get you on track for more time, wealth, and a lot less stress.