Although a very tedious and laborious process for most people, it is a essential step in the financial process to understand and measure your cash flow on a consistent basis. In other words, know what your monthly expenses and income is each month. Income is relatively straight forward; expenses are a bit more complicated. Income is your salary or commission earned while you are working, and in retirement you may have income from social security, pensions and from investments. Expenses are a combination of fixed expenses like a mortgage for example and discretionary expenses such as food and entertainment.
There are many ways to organize oneself to track income and expenses. Reviewing your bank statement for your checking account each month is a “old school” method. There are many different digital or software programs that are available to do this. Just do a google search and you will find many different options that are available.
Why this is so important is without this discipline, it will be impossible to make decisions regarding how to allocate your cash flow towards and financial planning goals. Goals such as saving for a major purchase, like a car, saving for retirement, college education planning, etc. Without this discipline people are prone to impulse purchases and spending beyond their means which results in things like credit care debt, bad credit scores, bankruptcy, not being prepared for future goals like college education planning or retirement. Or, if people are close to retirement, how will they know they can retire without knowing what their expenses are which is a primary driver of what they want their lifestyle to be in retirement.
The earlier you adopt this habit, the better off you will be for living a less stressful life, achieving the financial goals you have for your life, and avoid the pitfalls that prevent people from living the life they want to live.
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