This is an exercise I have worked through every year since I was 25 years old. At the time my father told me that as it relates to financial performance, he believed data tracked generally tended to improve over time. He was a lifetime investor (and absolute nerd) that focused most of his career on private equity. In his opinion, the scrutiny applied to personal finances should mirror the scrutiny applied to a new investment.
So early in my career he encouraged me to create a balance sheet to track personal assets on a quarterly basis. It felt like a silly exercise because I only had a checking account and a savings account at the time, and building a spreadsheet with just two entries felt dumb. Fortunately, I recognized that he was much smarter than I was, so I went along with it.
What I started to notice, however, was that the quarterly practice started to change my behavior. I wanted to show an increase in each quarter, which required a thorough understanding of my expenses. So I developed the personal budget template associated with this post to better understand where my cash was going. Awareness encouraged a more frugal mindset, and my savings as a % of my earnings started to increase.
The change was simple. Instead of looking at cash as a resource to support my lifestyle, I started thinking about keeping the value of that cash on my balance sheet. If I received a large bonus, for example, I would weigh an increase in rent against the decision to purchase a condominium. The condominium, purchased at an attractive price, would cause my balance sheet to grow over time whereas an increase in rent would cause my balance sheet to shrink in each subsequent period (all other variables held constant).
This practice also gave me the confidence I required to leave my full-time position in private equity to pursue building ASimpleModel.com in 2020. And it is in that vein that I wanted to share this post. If you are contemplating a change in 2021, make it an informed decision. This template can be used to evaluate what is possible, or to simply identify potential savings should you want to improve your financial cushion.
All the best in 2021!
Post Script: Should you want to develop the Excel skill set demonstrated during the “formatting blitz” portion of the video, please visit the Excel for Models course.