What gets measured, gets managed

measureIt’s a universal law in business and in life generally that what gets measured, gets managed.

People who are broke probably didn’t get that way by tracking every pound that they wasted…nope, they usually have no idea where it all went.

We usually get more of the things that we pay attention to.  If you want more money in your life, you have to give it the right amount of respect and attention.

So it follows that if you want to get rich, you have to have a handle on your finances.

In my financial coaching, I often get asked whether I use software to manage my portfolio / personal finances.  The answer is no!  I use a spreadsheet that I built from scratch over the years.

Building your own spreadsheet is easy. It just takes a bit of time to get used to this stuff. And using a spreadsheet is the only way to really understand your numbers.

Its vital to get up close and personal with your finances, to play with your numbers and see how small changes in inputs can lead to big changes in outputs. Its only when you do this that you really see how the pieces of the financial independence jigsaw fit together.

So I don’t recommend using your own spreadsheet as a free but inferior alternative to using a financial planner or commercial software. Black box solutions and financial planners don’t teach you and you don’t learn anything whilst using them. No, when it comes to tracking your progress to financial independence, doing it yourself is travelling first class.

But I’ve had enough requests for help and for recommendations of software etc to know that many people find even basic maths and spreadsheets a bit scary.  And those people maybe would find it helpful to have a template to start from.

So today I’m sharing a simplified version of my own spreadsheet.  The format has been tailored based on my journey to financial independence. The numbers are just dummy data used for illustration.

Other people will no doubt look at slightly different metrics and use different definitions of some of the terms. That’s fine.  There is no one single path to financial independence, no one true church.

So feel free to use this as a starting point for your own spreadsheet…but you shouldn’t follow it slavishly.  You should understand the linkages and tailor it to your own circumstances. It’s your servant not your master.

Its designed to be simple, to help intelligent non-geeks get to financial independence….not help quantum physicists or hedge fund geeks get PhDs. Its not meant to be a forecasting tool or simulator, something that tells you what the future will look like.  The spreadsheet has been designed to focus attention on what you can control…right here, right now.

The spreadsheet has been built with these principles in mind:

  • Keep it simple
  • The key metric for achieving financial independence is your savings rate
  • Focus on what you can control (and stop worrying about what you can’t)
  • Investment returns matter (of course) but can’t be accurately predicted
  • Risk can only be managed, never eliminated from life nor from investing

Here is a quick intro to each of the main tabs on the spreadsheet:

1) Calculate your investing costs

I know from giving coaching that just filling out a simple schedule of the funds in your pensions, ISAs etc and calculating what you’re being charged is a massive eye opener for many people.

The cost savings (and extra returns for you) of cutting your investing costs and charges can be life changing and can easily add up to hundreds of thousands of pounds over the years.  If you don’t believe me, check this out.

If it weren’t so sad, it would be grimly comic just how little clue most people have about what they are being charged. This might be where your fight back starts.

2) Manage risk via your asset allocation

You can reduce risk by diversifying your portfolio across different companies, geographies, currencies and asset classes.

Your asset allocation is just the mix of assets in your portfolio. Asset allocation is as much art as science. Better to be roughly right than precisely wrong.

If you are working and pushing for financial independence, you want a high percentage of your money invested in productive real assets like shares or property rather than in bonds or sat idle in cash, being slowly melted by inflation.

3) Track your net worth

To know if / when you have enough, you need to know both your net worth and your spending.

Your net worth is all the good stuff that you own (assets) less the bad stuff (liabilities) that you owe to other people.

A 4% safe withdrawal rate implies that you probably have enough never to work again when your net worth (assuming its sensibly invested) is at least 25x your annual required spending.

4) Track your Spending

You’re a smart person, you work hard and earn decent money….where does it all go?

Great question. Use this tab to monitor your progress.  If you have just stumbled across the concept of financial independence, you are probably gonna have a LOT of scope to cut your spending over the coming months.

Why not pin the graph someone visible (e.g. fridge door, in your hallway) where you see it every day?

When your investment income exceeds your required spending on basics, you are financially independent…congratulations! (as noted above, there are other ways of looking at this, but this is as good as any).

5) Calculating investment returns

Good news! This is the last tab…and its optional.

If you have a simple portfolio of Vanguard equity funds, you don’t need to bother with this.  You’re already invested efficiently and your returns will be what they will be…watching them closely won’t improve them…anymore than watching a kettle makes it boil faster.

If like me, you pick individual shares, then you should be tracking your returns carefully.   You can see my long term results here (Brexit has boosted the % returns in £ since that was written).

If you aren’t confident that you have an edge that will allow you to beat the returns available from the index, then you should ask yourself: why you are spending time and energy on stockpicking?

If you have feedback on the spreadsheet, you can leave a comment below.  I can’t personalise the spreadsheet for you…but remember, you can download it into excel and make whatever changes you want to suit your own circumstances.

I hope you find it useful!

19 comments

  1. Thanks TEA

    I was one of those that asked you for some help on a spreadsheet to track my investments. I have historically used Microsoft Money and have my investments tracked back to 1983 in it, but I’m concerned that Microsoft will not keep it working in Windows 10 forrever and wanted to switch my tracking to Excel. Hopefully your spreadsheet, plus an upgrade to Office 2016 and exports from microsoft money will enable me to switch to Excel.

    Thanks

    Gareth

  2. I’ve been using MoneyDance for a few years. It’s a bit quirky but it does keep track of different categories of spending and investments.

  3. I did the same, I set up a spreadsheet several years back from a blank document and it has evolved over the years. To an outside observer it probably would look incredibly complex but to me it all makes sense and allows me to track every purchase or saving I make, my net worth, my savings rate, and debts I’m paying off.

    I also have a spreadsheet for a rental property I own which links in with my main spreadsheet but also makes it quick and easy to do my self assessment tax return each year.

    There have been times where I’ve had massive inflows or outflows from my bank accounts (for example earlier this year when I bought a new house and did some renovation work to it) but none of it has worried me as I have complete control over all of it via my spreadsheets.

  4. Great spreadsheet. Where I have struggled a bit is that if I add up the SIPP, equity to release when I hopefully downsize the family home, and some other assets the numbers look pretty good but I can’t actually get my hands on the cash because I need to stay living where I do for some years and I am well under SIPP age of 55
    .
    So I can sit here and declare I am FI because the spreadsheet says I have assets and I could cheerfully live off 4% a year when the occupants of the nest have flown away. However because I can’t get hold of the cash, and the children are living their yummy middle class existence, the spreadsheet looks great but the cash flows don’t yet work. It’s a first world problem but is a practical barrier to giving the bird to the man and taking to a life of leisure.

    So my spreadsheet is a series of annual cash flows between now and 55 when I expect to get at the SIPP and flog the family pile. I take what I call my current assets (cash and ISAs and some passive income etc.) and draw off the current annual spend. I include desired but optional spending between now and 55 such as university costs etc. and I see if the number at the bottom is positive or negative.

    The spreadsheet tells me that in 15 months I can pull the ripcord and the cash flows work till I get to 55. I can obviously move that date sooner by reducing family spending but i can probably cope with the gulag for a little while longer. Simply knowing freedom date is pretty close is a huge boost.

    After age 55 the same principles apply with a lower family budget (kids fending for themselves hopefully) but the SIPP and house loot actually accessible. Then I can sit on the beach with a margarita and contemplate SWR.

    Great blog.

    1. Couple of things – Much FI talk omits the whole dependants thing. I have my first round of Uni costs kicking off now, and almost certainly one more to do. Difficult to decide how to balance reducing the kids’ student loan bills against getting myself done with the prison camp.

      And isn’t the UK pension system a distorter? The tax savings are so compelling that I, maybe like SurreyBoy have too much stashed that I can’t touch til 55, nowhere near as much that I can lay hands on now. I guess time and age will help me with that problem, but I’m beginning to recognise it and to emphasise the ISA stack.

      Then… I have an idea there’s going to be a tipping point where domestic expenses suddenly drop and – touching wood and barring a horrible crash – “it looks a bit marginal but maybe we’re there” one year will turn into “um – what shall we do with it all” next year. At least I’m hoping so.

      I can see I’m going to have to play with Mr TEA’s spreadsheet. Thanks for sharing. Mine’s a Google sheet, with ugly hacks in the margins to take care of (e.g) rebalancing across accounts. And it’s NW focused rather than spending (yeah, I know :/)

  5. moorgate man · · Reply

    Hi, don’t know if it is just me but I get an error when I try and open the workbook..

  6. Great post and spreadsheet, I’m going to look at using this as the basis for my own tracking, going forward, which has been pretty basic up to now. One thing I struggle with though is how to reflect the value of my partner’s final salary pension in a net worth or asset tracker. My own defined contribution pensions are easy as there is an obvious value, but when looking at final salary pensions, how would I determine what it is “worth” as an asset now? Any advice from anyone greatly appreciated.

  7. There are a number of ways you can value your Final Salary Pension scheme, but first you need to establish the current value; most schemes quote you what your pension will be worth when you retire at the Normal Retirement Age (NRA), based on the number of years you have contributed so far and the years to retirement. A rough and ready calculator I have used is to reduce the value of the pension quoted at NRA by 5% pa for every year early than it is taken, but the problem with that is it runs out at 20 years before and obviously if you have 30 years to go, there is still a value and I have never solved that one apart from asking for a transfer value and if you do that every year the administrators will get fed up with you!
    As a rough and ready measure to give an estimate of what it will be worth at the NRA, I used a 4% valuation rate, on the basis that I would expect that drawdown rate in a SIPP, so I multiplied the Pension value by 25 and added the lump sum.

  8. Nice Spreadsheet with formula’s intact thanks TEA – Of course like many i have my own much evolved creation, but there’s some nice ideas here for tracking expenses monthly which i don’t currently do – requiring a lot of unpicking and categorizing debits from CC’s and Bank Accounts at the end of the year. Clearly a bit more discipline could make my year end reconciliation a bit simpler thanks again
    Cigano

  9. […] via What gets measured, gets managed — The Escape Artist […]

  10. Meh. It’s better than mine 🙂

    Nice work TEA, hope it gets wider use and recognition.

  11. Living Cheap In London · · Reply

    Thanks for taking the time to put this on the inter-web TEA. Appreciated. it’s always good to untangle how others are tracking things. My spending & net worth tabs work just like yours, though I sense on the investment pages your sheet has some formulas I can look to learn to improve my own (crude in comparison) work.

    One thing i never manage to put a number down for on these things is my wife’s NHS pension. We get an annual statement, of course, & this includes the accrued-to-date Tax Free Lump Sum (easy enough) & then the annual accrued-to-date pension. Being an NHS pension this just provided as “your pension will be £13,642 per year” (for example). This is index-linked & will be a sizeable part of our retirement income, which is lovely, but how to include it in FIRE calculations. I currently just divide it by 4% to give it a “draw down equivalent” value, but welcome anyone else’s ideas on this.

    1. Hi

      I have a related question. I’m in the local government pension scheme also defined benefit. The pension website has a tool that shows me what my deferred benefits would be if I left at some point in the future which is interesting – £6k per annum if I left in 5 years, £11k if I left in 10 years. Would still have the option of taking a tax free lump sum? And this is still difficult to quantify as an asset, am I better working out my annual cash flows until I get to the age I can drawdown the pension? I’d not thought about dividing it by 4%; if we can’t get an accurate figure maybe this is good enough?

      Great post and comments!

  12. donaldtramp1 · · Reply

    Great post EA.
    I’m not a spreadsheet boffin by any stretch of the imagination so it’s great to see this and quite reassuring to see some of the numbers it spits out! Found this really helpful. If only everyone thought along these lines. The fund/wealth management industries would be struggling.
    It’ll be interesting to see what Vanguard offers when they launch their personal pension provider service. See if I can pay even less fees than I’m paying now,
    Also struggling to put in my wife’s final salary pension……

    Thanks again

  13. Thanks all for the comments.

    For anyone wanting to include an accurate value of a defined benefit (DB) pension scheme in their net worth, the answer is easy (at least for a private sector DB pension)….get a transfer value from your pension administrator!

    This tells you the cash amount you would get if you moved your pot to another pension (eg a Self Invested Personal Pension where you have full control over costs and investment decisions). It should be free to get a transfer value and you are under no obligation to move your money out…its an option…and options and information like this are valuable.

    http://monevator.com/cashing-in-a-final-salary-pension-is-just-the-first-decision/

    1. You can’t get a transfer value for a public sector pension because you can’t cash them in.
      I’ve never bothered calculating the lump sum value of my DB pension, to my mind that’s the wrong way round, I’m going to be living off an income rather than a lump sum. So I just take the approach that DB pensions and state pension reduce the income that needs to be taken from my portfolio.
      I think estimating the income stream to be taken from the lump sum is actually more difficult (I’m not an income investor so will not be aiming to draw down only the natural yield, though i acknowledge that is a simpler approach).

  14. numbercruncher · · Reply

    Really like this spreadsheet although my total charges are 0.59% A little above your 0.4% target.

  15. Christopher Foulkes · · Reply

    Thanks for taking the trouble to put up the spreadsheet. Can it be downloaded by those oddballs who use Apple’s Numbers rather than Microsoft Office? We can easily open an Excel sheet, but I can’t find the magic button on your site…. Thanks again Chris

  16. Hiya – just wondering if you would count Automated Dividend Reinvestment transactions as a positive or negative figure in the XIRR calculations? Assuming they’re positive (as they’re essentially the same as Dividends) but would like to be sure.. Thanks!

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