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Tips for managing your money

Managing money is challenging and important. Banks and credit card companies earn their fortunes from people who don’t understand where there money goes. Bank fees and high interest rates are much easier to avoid if you understand exactly where you are spending money. Here are some tips from hard won lessons in managing money.

Track your receipts

Use a finance program like Moneydance or Quicken. Make an account for anything that has an ongoing balance — savings, checking, credit cards. Don’t track cash as a balance, it’s an expense. Input deposits and expenses for these accounts often and manually. Don’t rely on the bank or credit card company to tell you what you’ve spent.

Fees and service charges are equivalent to extreme interest rates. You get charged because you really don’t know how much money you have right now. You must input your expenses often so you KNOW your balance.

Know your bottom line

How much money you HAVE is a simple equation. It’s how much money is in your bank accounts MINUS the money you owe your credit cards. Know this number. Memorize it. It doesn’t matter if you have $10,000 in the bank if you owe $11,000 to VISA. You are really down $1,000.

If you keep your accounts up-to-date the finance program should show this number on the main dashboard.

Reconcile your accounts

To reconcile a statement is to match what you think you spent with what the bank or credit card company thinks you spent. Banks make mistakes. You do, too. Reconcile every account every month. Do it! It’s the most important thing you will do to keep your finances in order. Reconcile bank accounts and credit card accounts. It will teach you where problems are happening, it helps you review where your money is going, it also shows where you may be missing receipts.

Every finance program has a reconcile feature. Use it!

Simple expense categories

Finance programs generally come with way, way too many expense categories. I swear, they would have a category for dog food and another for kitty litter. That’s dumb. You only need seven categories.

  • Auto: Every expense related to vehicles
  • Bills: The MUST PAY bills like mortgage, electricity, phone
  • Charity: Plan to be a charitable person
  • Health: All health related expenses like physician, prescriptions, hospital
  • Home: What you NEED to maintain your life — like groceries, clothing
  • Personal: Money you like to spend but don’t have to like dining out, watching movies
  • Income: All sources of income

You can make subcategories like home/groceries, personal/dining. You don’t need these but they can be helpful in identifying how you spend your money when doing your budget.

Don’t sweat the receipt

If you have expense subcategories like home/groceries don’t get crazy inputing receipts. A trip to Walmart may include expenses for groceries, office supplies and clothing. Don’t try to break it down like that. You want to be FAST inputting receipts.

Instead, ask yourself, “What does most of this receipt represent?”

Buying groceries and clothing sound like a Home expense so just put all Walmart receipts into home/groceries.

Going to a restaurant is easy, personal/dining.

What’s more important is the purpose of the receipt. Where does it generally fall in the seven categories?

Budget the seven categories

Figure out your average amount spent in the seven categories and put that number in the budget portion of the finance program. How much income do you expect per month? How much do you spend on bills each month (on average)? Don’t worry about breaking it down into the subcategories. Just pick a number for all seven and use that.

Moneydance will automatically show your budget balances in a bar graph on the home screen. At one glance you can see that you are close to exceeding the budget for any category.

This is the most important graph you will ever see.

With “Net Cash” and “Current Budget” shown on the home screen, you can see exactly how much money you have and where you can spend it.

Simple paper path

Use a simple method for capturing paper receipts. First, have an inbox someplace where you can see it. Mine is in the kitchen. My wife and I put receipts there. Every few days I input them into Moneydance.

Second, use 6×9 clasp manilla envelopes. Label them with the month and year — “December 2011”. Put receipts, bank statements, billing statements inside the envelope. At the end of the month, clasp it shut and use a new envelope — “January 2012”.

Third, store the full envelope at the end of the month. Save the envelopes for three years. Don’t touch them. Just let them be. If you need to return something, look up the transaction in the finance program to find the date and go to the right envelope in storage to find the receipt.

At the end of the year, destroy the old receipts. For example, at the end of this year (2011) I’ll destroy all 2008 receipts.

It’s not too hard

All this may sound like a lot of work and some of you might say it’s too hard and not worth the effort. Many people pay hundreds, even thousands of dollars in late fees, overdrafts, and high interest rates. If you track your expenses, you will learn to avoid these fees.

You will also find places to save money. You will learn to spend less. You will also KNOW how much money you have right now. Saving money is more valuable than earning it. A few hours a month will save countless frustrations. It’s worth it.

Make a budget. Follow it. Input your receipts. Keep it simple. Do it!