CFO of Life #109: The Secret to Financial Freedom: Your Personal Cheat Sheet

I’ll be honest, dealing with your personal finances isn’t easy! It takes time to learn everything you need to know and to build the mental models of why you should even care about it. It also takes a lot of time to build your goals and the justification for why you should aim for them. It also takes a lot of time to learn what to track and why to track it. But it is all worth it as without having my tracking system I would not have had the joy of feeling the way I felt:

-The first time I compared my debt to my savings and I realised that I had more savings than my student loan.

-The first time I saw the breakdown of my yearly spend in one place and it was not as bad as I expected.

-The first time I took a trip abroad and didn’t worry about the money I spent on it.

-The first time I realised that I could eat out and not count my change the day after.

-The first time I realised that I was doing well and didn’t have to limit myself to save for the future aggressively.

I hope those examples resonate with you, but if not, I will be more than happy to share a few more points on how I felt when building my financial cheat sheet and how I feel now years later!

In this week's newsletter, I will show you the only cheat sheet you need for your personal finances, and the 5 points I will cover are:

1. Why spend the time and build a full-fledged finance cheat sheet?

2. What to add to your finance cheat sheet?

3. How to build your cheat sheet?

4. How to maintain your cheat sheet?

5. The real reason why I do it and why you should even care about this!

 If this is your first time reading this blog, my name is Simeon Ivanov (Si-Me-On). I write this weekly blog about personal finance called CFO of Life to bring you on the journey towards becoming the CFO of your Life! I hope you like it and that you stick around for the long term!

Now, let’s get into the thick of it!

Because it will help you build a better life, it will help you sleep better and reduce the noise when making decisions. I know that this sounds too good to be true, so let me give you 3 real reasons why you should actually do it:

-Helps you understand how you spend money: 

 If you track all your money on a weekly or a monthly basis, you will quickly learn how you spend it. You will get used to seeing where you go and at what time, which would help you understand your patterns. It will also show you if you have accidentally forgotten to stop that one subscription that was meant to last 1 month only, but you’ve dragged it out for a year, so you can cancel it and start saving money.

-Helps you understand what you spend money on:

 Going through all your purchases, you will quickly understand what is a normal thing for you and what is the true minimum that you need to live with. And I can bet that seeing what you actually purchase on a day to day basis will surprise you, as we frequently forget the small things we buy and they are exactly what adds up at the end.

-Helps you understand your patterns and your money psychology:

 Last but not least, while you build your financial cheat sheet, you will learn all about your personal money psychology. You will learn what you like to splurge on and where you hold off, you will learn what your guilty pleasures are. But you will also learn about your fears, your mental blockers, all the things that make you “stop” and all the wrong things you’ve learned in life.

 Now that you know the 3 great things you will learn about yourself from building your cheat sheet, let me tell you 3 simple steps you need to take to build it.

Step 1:

 Open a spreadsheet and list all the things you purchased last month. The easiest thing you can do to get a list of all those transactions is to go directly to your bank and get your last statement. It will have all the information you need for the last month.

 This might sound super daunting, but after 2-3 months you will get used to it so much, it will start taking you no more than 5-10 minutes for each bank account you have. And with time, you will see more and more of the value of tracking your purchases, so by the 6th month or so, you will fall in love with the process!

Step 2:

 Give each one of your purchases a category or as I call it “a purpose”. The easiest way to do this is by marking all your purchases in the respective category they belong to ie. Needs, Wants or Future Proofing. Needs are all the things you must have to live your life - rent, transport, food, personal care, debt repayments and any essentials for your day to day life.

Wants are all the things you want to have in order to have a good life - travel, entertainment, gifts and all the non-essential purchases you need to have a better and more enjoyable life.

Future Proofing are all the things you “buy” or the money you set aside to have a better life in the future. Step 3:

 Sum up all the money you spend in each category and calculate it as a % of your income, which you can set up with a few clever Excel tricks, or you can do that manually if you enjoy doing so.

 And that is all - all you need to conquer your finances, to create a better life and to reach your goals.

 Simply adding up your spend will show you the amount you spend, but if you don’t have a benchmark, you will never know if you are doing well or not!

 And that is exactly what the secret sauce of the finance cheat sheet is. It is a bunch of benchmarks that you put together for yourself so you can understand how you are doing, how well you are managing your money and how you can live life better!

 Since this is the introduction guide, I will not overwhelm you with all the things you can track, you can find most of them in last week’s article (here). That is why this week we only focus on how to use the 50/30/20 split - which is the simplest and quickest way to gain a tremendous amount of information for your personal finances, with the least amount of calculations and fluff.

 As you might expect, this simply represents the amount you spend in the 3 categories we used in step 2. For most people, the split should look like this:

50% for your Needs 30% for your Wants

20% for your Future-Proofing

So you can imagine it, here is how my personal finances look as of today:

It is that simple, and that insightful! You can easily see that I am spending just about the target rate for my Needs, but I am not spending enough on my wants. That is simple to explain, as I decided to put away a bit of money towards my investing and make sure that I give my future self a bigger and quicker push.

 That also tells me that I am doing well and that I don’t need to worry a lot, that there is some room for improvement, but in general, life is going in the right direction. I do know that this is a super simplified version of what you can do, but the simpler the better.

  Once you get into the groove, maintaining your cheat sheet is easy!

 It would automatically calculate how much you have spent against what your targets are (50/30/20). All you would need to do is keep on adding up your transactions month after month and label them correctly. 

 With time, once you get used to tracking your spending, you can start adding more and more labels. You can add categories, types of spend or even the reason you made that purchase, those are all valid things to know about why you did what you did.

 And that is when you should start customising your financial tracking cheat sheet! That is the moment when you can make it “yours” and you can make it help you answer the questions you want answered. You can make it to help you make the decisions you want to make - with the KPIs you want to track!

 Last but not least, let me tell you the real reason why you should even bother tracking your spending in this way. It is simple, if you run your personal finances as if they were the finances of your company, you will put a lot more time and attention into it. It simply frames everything in a way that is more reliable, easier to understand and brings a lot more joy when you can see your company continuously being profitable.

 On the other hand, it helps you frame the bad times as time when you need to buckle up and work harder. It shows when you should work harder to ensure your “business” does not go bankrupt. 

 I hope this gets you as excited as I am! I love how much I have learned from tracking my finances. I love how much freedom it has given me and how much happiness it has allowed me to have. 

 That’s why I want you to give it a try!

 Take the time for the next 3 months and track your spending, track what categories they are in and how that aligns with your goals. Do that and you will see how much you will learn about yourself, your habits and your true financial situation, not the one that you perceive to have!

Next week we will look into the chapter of personal finances, what assets and liabilities are and why you should care about them!

Post #109 in the series CFO of Life #si #personalfinance #CFOofLife