%Efficiency – Financial Monitoring

Earlier today I took a flight from Philadelphia to Rochester, so I had some time to kill.  I pulled out a notebook and started writing down some thoughts on monitoring my financials.

A) Income
B) Expense
C) Income – Expense = Theoretical Savings
D) Year starting funds
E) Year ending funds
F) Year ending funds – Year starting funds = Actual gain
E) Actual gain/Theoretical Savings x 100% = % efficiency of savings

Here is some explanation to what I’ve written above (A to E).  The income is your salary over the course of a year.  The expense is your expenditures over the course of a year.  We would subtract expense from income to get theoretical savings.  If your number is a negative, you are spending too much money off the back and need to reexamine your spending habits.

Next, look at your starting funds (total) and your year ending funds (total).  Again, if you are receiving a negative, you are obviously doing something wrong (not in the calculation, but in how you are spending/saving).  These funds will include your savings, 401K, other investments, and so on.  We are looking for total value of your cash and investments.

Next, you divide theoretical savings by actual gain and multiply by 100% to get %efficiency savings.  The %efficiency savings will tell you how well you utilize your income.  If you get 80%, you are losing 20% somewhere.  It is your job to identify where you are spending this and does it make sense?  If you are up to an 80% efficiency this year, strive for 85% next year.  Each year, we should learn how to manage our money better.  The point of this exercise is to track our financial performance and set goals based on that.

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