It’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!