Friday, 28 February 2014 12:29 Last Updated on Friday, 28 February 2014 12:33
Your Money Matters, January 26, 2014
If I asked you what your mortgage payment or rent is, odds are you could tell me.
What if I asked how much you spent on heating oil or out of pocket medical costs last year?
You probably could not answer that off the top of your head, but with a good, up-to-date recordkeeping system, you could retrieve that information with a click of the mouse or flip of a page.
You might think you don't need to track your money, because online banking does that for you, and you can always see how much money you have. But online banking (or your good old check register) doesn't always organize your spending in a format that's easy to analyze, and that analysis is important to have.
When you are aware of what you are spending and where, you can spend more purposefully on the things that you value most, rather than letting loose change slip through your fingers.
An efficient tracking system also captures tax deductible expenses, so you can claim the maximum deductions you are legally entitled to. Looking at your spending data sometimes can be a reality check.
Paper, paperless systems
What's the best system for keeping track of where your money is going? The one that works for you. Paper, computer program, app; it doesn't matter as long as it is something you're going to use.
While paper-based systems require more math than an electronic system, they are pretty basic to implement. It can get tricky if you are spending out of several accounts, like credit cards and his and hers checking accounts, but if you only need to track an account or maybe two it can work.
For example, it can be as simple as a chart with categories across the top and the days of the month down the side, and recording each bill you pay or dollar you spend daily under the appropriate category, adding the columns at month's end. I did say simple, not easy, because it can be cumbersome to write everything down. Ledger books can give you a start, too, such as the Dome home budget book you can pick up at Staples.
Another low-tech way to keep track is to use the envelope system. With this system, set up an envelope for each category to track, like groceries, gas or eating out. Each pay period withdraw the amount of cash you assign to each category, and fill each envelope with that cash.
The original way of using the envelope system called for an envelope for every category, including things such as your mortgage and electric bill, but that's not really practical in this day and age, and it could be risky as well to have that kind of cash around.
So let's just stick with those categories that are more variable, or "slushy." When you spend any money from one of those categories, use the cash in the corresponding envelope. When you run out, you must either stop spending in that category, or, if it can't be avoided (like buying food), borrow from another one. No need to necessarily track each dollar — by the amount of money left, or not, you'll soon see if your spending estimates were realistic. Guaranteed you will also be very aware of what you are spending.
If electronic recordkeeping is more to your liking, you can stay low-tech and record on a spreadsheet (like the paper system above). Spreadsheets allow for quicker addition and copying/pasting than paper, of course, and you can color code and customize.
If you like Dome books but prefer a paperless system with automatic calculations, there is a software version available. For those who like the envelope system but don't want to keep cash around, mvelopes.com is a free, online version.
I tried mvelopes a few years ago and had difficulty following it, but since then they have updated the tool. A nice feature of mvelopes is that when you purchase something with your credit card it subtracts that amount from your spendable cash, so it is available when it's time to pay the bill. Mvelopes also has a free app.
Quicken is my program of choice. It resides on your hard drive, so all of your information is viewable without Internet access, and functions like a traditional check register (but without the whiteout).
You choose a category for each transaction, which flows to reports you create. You can also "tag" a transaction, so if you are tracking gasoline as a general category, you can tag purchases for different vehicles without having to create a subcategory.
Quicken's "Cash Flow" feature allows you to enter upcoming bills and paychecks, and project your balance to month's end. You can download transactions from your bank and credit card accounts right into the program and assigning categories, eliminating some data entry. You might have to train it to categorize properly, but once it knows that Sunoco is not "dining out" it remembers most of the time. Quicken also can pull in data from investment custodians like Vanguard, allowing you to see your portfolio allocation. Stock and mutual fund prices are updated automatically.
Mint.com is the main player in online budgeting. It is free, and can be used on a computer browser or with an app. When you sign up for an account, you'll search for your financial institutions and provide your login information, as long as your financial institution is supported. Mint aggregates your information from banks and credit cards, so you can see all of your activity together, updated automatically. The information is real time, just like you would see on your bank's website.
Information is accessible from anywhere you have an Internet connection. You can enter a goal, like a trip, and it will not only create a savings plan for you, but help you calculate how much you need, with links to outside resources as well. You can create a budget and compare your spending to families in other locations you specify, as well as track your actual vs. budget.
You Need a Budget, or YNAB, is not only a software program, but an educational system. At $60, it costs about the same as Quicken and Dome's software, and accesses webinars and email courses.
Once you set up your regular bills and expenses, YNAB helps you by setting aside funds for non-monthly bills (like a quarterly insurance bill or car repairs) so the money is there when you need it. YNAB syncs across multiple computers and also has an app. You can try it for free for 34 days.