Preliminary closing of the books

One of the activities that is part of the new year reset is a preliminary closing of the books for our household. While the final closing happens after tax season, we have enough information now to tally our income, expense, tax contribution, and savings.

All of these help me look at two sets of ratios –
1. Expenses %, Taxes %, and Savings % of total income
2. Growth in Expenses, Taxes, and Savings since the previous year

(example in this sheet)

The next step is to take a look at the breakdown of expenses to understand the biggest changes during the year (illustrated in the sheet linked above).

Doing these two steps answers 3 important questions –

1. How well are we doing with saving our money?: I pay more attention to the rate of savings than I do raw savings amount. The latter can go up simply by means of income going up. However, the savings rate doesn’t lie – it tells us how quickly our lifestyle is getting upgraded.

It is important to acknowledge here that it is okay to upgrade our lifestyle. It is just important to do it in a thoughtful way. Doing so in “category 1” expenses often mean we are climbing the hedonic treadmill (better home, better car, etc.  – this has long term consequences). And, doing so in “category 2” expenses means it is easier to cut back since this is in the bucket of guilt free spending. In either case, this is a good time to take stock of these expenses and ask ourselves if they are indeed making a difference to our happiness.

The other benefit of savings rate is understanding how much attention we need to pay to our expenses in the coming year. If the savings rate is between 0%-20%, I’d recommend paying a lot of attention. Budgets may be helpful. If it is between 20%-40%, some amount of regular attention is good. And, if it is in excess of 40%, you are in a decent spot.

Regardless, you’ll want to spend a bit of time looking at which categories grew this year. In my experience, there isn’t much insight to be gleaned here – if you’ve been reasonably plugged in, there should be no surprises here.

Finally, there are two reasons to not worry about temporary dips in your savings rate. The first is a jump in your tax bracket – this is a side effect of a good thing and you’ll be able to readjust next year. And, the second is a temporary expense – e.g. sending two kids below 5 to childcare. The only important caveat here is to beware marking too many expenses as temporary. There are always going to be surprises and unexpected expenditures.

2) How are income, expenses, taxes, and savings growing every year?: This is a very important piece of the puzzle – every one of these numbers tells us something.

Income growth tells us how we are doing in our career/business. It may lead to important questions like – do I need to pivot careers? do I need to re-negotiate my salary? do I need to quit this job and go out on my own or vice versa?

Expense growth, tax growth, and savings growth all have an effect on each other and lead to different insights. For example, it is vital that expense growth stays lower than income growth. If this is not true, there better be good reasons.

And, second, if tax growth has been rapid and is increasingly a big part of your mix, it may be time to hire a tax consultant to make sure you’re not making any mistakes.

3) Are we being thoughtful about investing what we save?: This takes us to the next sheet and is about ensuring we’re getting the basics right. There isn’t a right answer here as it depends on your goals. But, it is an important to check to make sure you’re being thoughtful about what you are holding in cash vs. investing.


The preliminary close of the books is an important part of the yearly financial reset. If all is mostly going well, then that’s great. But, if not, it is important to plan some concerted effort toward improving our processes.

Our finances are a foundation for long term happiness and are a reflection of both the privilege and the career and lifestyle choices we make. As a result, they can help point the way to making better choices to make our financial engine work better.  When this engine is working well, it acts as an enabler and gives us opportunities to increase our day-to-day and year-to-year happiness.

When it isn’t, it messes with our heads and our relationships.

It is worth paying attention to.