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Have you ever wandered into the subreddit called /r/dataisbeautiful? I recommend it. The contributors to that subreddit take all sorts of data sources and come up with ways to present the data in picture-form. The results are generally very pleasing aesthetically.
Over the last few days a certain kind of diagram, called a Sankey Diagram, became popular on the subreddit. A Sankey diagram is a kind of flow diagram, where the width of the arrows is proportional to the flow quantity. For your viewing pleasure, here is a Sankey Diagram of the BITA household savings for the year of 2017.
As I indulged in some eye-porn over at /r/dataisbeautiful, and enjoyed playing around with my own diagram, I started to think about the importance of visualizing your financial data.
Why Visualization Of Financial Data Is Important
We all have our favourite methods for tracking our money. I use Mint, Personal Capital and an assortment of home-grown spreadsheets to track my spending and my investments. Irrespective of what method you use to track and tame your numbers, it is important to use visualizations of your data, and not just rely on eyeballing rows and columns of numbers.
Visualising your data can bring new insights
Imagine that you track your spending in an excel sheet like so:
Now consider seeing this same data as a pie chart as well:
Ask yourself: what do you notice about the numbers now that perhaps didn’t strike you before? For me, seeing the same data visually and as percentages instead of absolute numbers, makes it much more obvious which areas of spending are worth focussing on for optimization to get the maximum bang for my buck.
Visualization Can Help Identify Trends
Visualizing your financial data can sometimes help you identify trends faster and act on them. Let’s use our budget example again to illustrate this point. Imagine a spreadsheet tracking spending over a period of months that contained data like this:
Every month you dutifully make all your entries, and keep an eye on the totals and the average. Nothing alarming there right?
Now imagine that you were also using this data to draw trend lines of each category of spending. You might then notice that something odd was going on with your utility bills:
The utilities themselves are such a small percentage of your budget, that just eyeballing your totals and averages doesn’t make it obvious that there may be something going on in this category that you need to keep and eye on and investigate.
A Picture Is Worth A Thousand Words
Our brains can absorb more information faster from a visual than from text or numbers. Our brains are wired for rapid visual processing, and we should take advantage of this fact when trying to wrap our heads around our numbers.
Consider this example. Keeping track of your asset allocation is an important part of financial tracking. Personal Capital does a bang up job of using a Tree Map Chart to help you visualize your asset allocation.
Look closely at the tiny line of text at the bottom of that image and ask yourself if it is easier for your brain to grasp the asset allocation of this portfolio when it looks at the tree map or when it reads the same information as text and numbers.
I cannot emphasize enough the importance of tracking your numbers. To get your money to work effectively for you, you must first understand it. And to understand it, you have to track it. Once you are in the business of keeping an eye on your numbers, consider upping your game by throwing some visualizations into the mix. You might be surprised by the new stories your numbers have to tell.
Oh and if you would like to generate your own Sankey diagram, the tool I used for the diagram at the start of this post is free and can be found at http://sankeymatic.com/build/.