The Personal Finance Series Part 3: The Pillars of Insight

Welcome back to our journey of constructing your financial temple. With the foundation securely in place, it’s time to erect the pillars—our Pillars of Insight. These pillars are so named because they provide critical understanding of our finances. There are three essential pillars that form the holy trinity of financial awareness—fundamental numbers everyone should know:

  • What comes in
  • What goes out
  • What is left

But before we start noting everything down, it’s important to understand the benefits of doing this the old-fashioned way.

The Psychological Benefits of Manual Entry

While apps can automate these calculations, manually jotting down these numbers offers significant psychological benefits. This process taps into several psychological phenomena:

  • Generation Effect: Actively generating information, like writing down numbers, improves memory retention. When you manually record your income and expenses, you’re more likely to remember these details, enhancing your overall financial awareness.
  • Better Mental Accounting: Writing down your financial figures helps you mentally segment your budget. This segmentation aids in categorizing expenses and income more effectively, making it easier to track and manage your finances.
  • Temporal Segmentation: By noting the frequency and dates of your income and expenses, you create a temporal map of your finances. This helps you understand the timing of your cash flow, enabling better planning and anticipation of financial needs.

What Are We Writing Down?

Understanding cash flow is paramount. Financial apps often calculate your yearly income by including bonuses or holiday allowances, then divide this number by 12. However, this can give a skewed view of your actual financial situation. For example:

  • If your yearly income is €50,000, dividing this by 12 doesn’t reflect the actual monthly cash flow you experience, especially after taxes and deductions.

Instead, focus on your incoming cash flows—the amount that actually appears in your bank account after taxes and other deductions.

Pillar 1: What Comes In

Begin by recording your fixed income, typically your salary. Enter the monthly amount you expect to receive, noting the frequency of these payments and your pay date. This will help you predict when your next salary will arrive. Once you input these numbers, you’ll be able to see your income on yearly, monthly, weekly, and daily bases. Use the comment section to note any expected changes, such as a salary increase based on your Service Level Agreement (SLA). 

Step 5: Fill in your Fixed Incomes

Pillar 2: What Goes Out

Next, document your monthly expenses. This step may seem tedious, but it’s incredibly beneficial. List your recurring expenses, such as:

  • Rent
  • Health insurance
  • Subscriptions (e.g., Spotify)
  • Gym membership
  • Travel insurance

Seeing these numbers written down can be eye-opening and sometimes a bit shocking. While it might feel overwhelming at first, this exercise makes your expenses more tangible compared to the impersonal figures generated by automated bank apps.

If you miss a structural expense, don’t worry. You now have a clearer financial overview and are becoming adept at managing your budget. Remember, getting your finances in order is a process, not an instant transformation. See below an example of the amount of fixed expenses.

Step 6: Fill in your Fixed Expenses. You can leave the Value Category open

You might notice I haven’t included groceries as a fixed monthly expense. That’s because I don’t consider groceries a fixed expense since it varies from month to month.

Now there is one type of fixed expense you never expect but always comes. These are your yearly expenses. A good example is your water bill and your garbage disposal. It is good practice to note down what date these expenses will be deducted, so you can plan ahead. 

Pillar 3: What Is Left?

Step 7: Check in the final row what you Free Cash Flow on a yearly, monthly, weekly and daily basis. 

The final pillar is the balance remaining after subtracting your expenses from your income. This simple calculation can evoke strong emotions—whether relief or concern. Regardless of the outcome, you’ve now established your Pillars of Insight. With these in place, we can proceed to reinforce them with our Pillars of Refinement.

Stay tuned for the next part of our journey as we delve deeper into refining your financial structure.