Total Financial Management – Tracking your finances using free Net Worth Spreadsheet

Tracking your finances – What gets measured gets managed!

There are three pillars of Total Financial Management here at Frugal Investors – and for those of you who regularly follow this site, you can probably tell what those are:

• Saving. Earn a stable income through regular work or business ventures & save 30-50% of your after-tax income. Don’t go crazy, take the middle path and save the most that you can.
• Investing. Take the money that you earn and invest it in real estate, stocks and shares, bonds and fixed cash or alternative assets
• Having a goal. Ensure that you know where you are going: you have a target retirement age, income level or pension pot to shoot for

In this section I want to focus what you can do to track your finances better, including access to a free Excel template for monitoring your net worth.

A Brief Reminder on Saving and Investing

Before I show you how to simply and effectively manage that goal, let’s remind ourselves why we want to achieve it in the first place. The reason is pretty basic: compound interest.

The compounding effects of long-term investing are pretty dumbfounding. The average return on the S&P 500 since 1926 is nearly 10%. If we shorten this time period and take, say, 1950 as a starting point which is only 69 years ago, we get these results:

S&P 500 – 90 Year Historical Price Return (Non-Inflation Adjusted)

For a single dollar invested in 1950, the S&P 500 index has gone from 19.52 in October 1950, to 2986 as of today. Not including dividends (positive) and the impact of inflation (negative) that’s a 145-fold return in 67 years.

Now for those who understand the negative effects of inflation – the inflation adjusted returns are less: your $1 invested in 1950 would be worth approximately $15 in real spending power once you account for inflation and assuming you did not re-invest dividends. On the other hand if you didn’t touch the dividend income and you re-invested it in more shares, then your $1 would be worth $55 today adjusted for inflation. That’s enormous and it is representative: if in theory today was October 1950 and I was writing this as a newspaper article, then my £1 million investments, left to batter on for 69 years with the same level of performance, would be worth £52 million in today’s money by that time in the future.

The lesson? Invest your money early, and re-invest income and dividends, over a long period of time to become truly wealthy.

Therein lies the Frugalist Investors financial plan: I intend to get as much of that future compound growth as possible and to achieve two goals simultaneously. That is, to retire early, and to ensure that what I retire on keeps growing well into the future.

Having and Tracking Your Financial Goal

I have decided to set early retirement as an interim goal. Once I have achieved that in 11 years I can re-set the goal and aim for something higher.

In order to achieve my financial goal of owning a balanced portfolio of £2,500,000 in assets, I need to know where I currently sit in terms of performance. The first logical place to start is to nail down where I want to end up when I retire and work backwards.

I want to have household income of between £100k and £110k when I retire. I will then step out of full-time work and take on part-time contracts to supplement that income and cover most, or all, of my expenditures. A key difference here is that I don’t actually plan to spend £100k per year in today’s money, but rather, to have a portfolio that continues to grow over time (I estimate our total yearly expenditure to be a conservative £45k per year for a family of 4).

To achieve your target income there’s a simple formula that you can use to estimate the retirement pot you require: multiply the income you desire by 25 (the Multiply by 25 Rule).

That gives me a required pot of between £2.5 million and £2.75 million based on £100-110k per year. I was a bit surprised by that figure, so I decided to go with £2.5 million as a target retirement nest egg given that I plan to continue working in some capacity.

Here is a simple graph estimating how long it will take me to reach this goal:

Because I want each and every one of you to thrive, and succeed, I have decided to make this bespoke template available to you, so please click here for free access to this excel template. It has a simple set of inputs and uses Macros to update the graph automatically.

Nothing fancy. All you need is 10 minutes every 3 months to update on your progress. I update it monthly.

According to this my family should be in a position to achieve that retirement goal by February 2031. That is 11 years and 3 months more at my current savings rate, assuming an average annual return of 5% per year. The return assumes that dividends and income that I receive gets re-invested into more stocks and bonds, which in turn grow at an average rate of 5%. The reason I have gone with 5% as a conservative assumption, is that it is better to ‘under promise and over deliver.’ I also foresee a turbulent set of market conditions over the next 10 years and I want to be prepared.

Anybody can do these calculations. All you need to do is to figure out what target annual income you want to achieve by the time you decide to retire. Multiply that figure by 25 and you will have a good estimate for the size of pension pot you will need to support that income. Median disposable income in the UK in 2018 was £28,400 per year. That means to have a median income in retirement you’d need a pot of approximately £710,000 (or £490,825 if you work to 67 and draw the full New State Pension).

Current Net Worth Breakdown for David

Here is a breakdown of net worth from a spreadsheet that I keep to track our family’s assets and liabilities:

When I put pen to page and sat down to record exactly what David Inc. owned and what liabilities I had on those assets (subtracting out my mortgage, for example), I reached a figure of £1,063,954 for my net worth.

It’s really interesting when you look at what you’re worth, subtracting away mortgages and things like credit card debt. Without having a clear retirement goal, I realised that I was saving well, but doing so in a vacuum and not understanding what I wanted to achieve. Now I have a clearly defined goal!

In order to plan appropriately for retirement you need to know exactly where you are and also where you are shooting for. This is a good opportunity to appraise your debt levels: if you have a larger mortgage, then it may make sense to make overpayments and reduce the cost of your mortgage before loading up on investments.

In our case, my wife and I spent years simultaneously paying off our house mortgage and ploughing every last pound we could afford into investments. Over an eight year period it paid off handsomely! I happen to enjoy being the Frugalist Investor and saving money, perhaps, for a nicer holiday rather than expensive material possessions.

How to Use the Spreadsheet

In the future – perhaps 2-3 years from now, when the technology is better – I plan to write a review of the new Open Banking apps out there and provide you with a good option for tracking your finances.

For now, the reality is, a lot of the apps are sub-par and don’t have access to major Stocks & Shares brokers like AJ Bell, Hargreaves Lansdown or Interactive Investor. As a result, you are going to have to login to these accounts anyway to get the values of your investments. The current apps track your bank accounts and spending habits, but a lot of their services charge you hidden fees or aim to sell you financial products.

I believe in keeping it simple and low-tech.

Therefore it makes sense to use good old fashioned, basic Excel. It will not take you any more time. Also, the discipline learned by managing your finances on a monthly or quarterly basis cannot be under-stated: you need to avoid trading in and out of shares and trying to time the market. Instead focus on managing You Incorporated and managing it well.

Have a look at the free Net Worth excel template and start tracking your finances today!