Keeping track of where your money goes is a useful discipline. Sometimes it will reveal ways to save money; sometimes it will alert you to ways you are wasting money; and sometimes it will show you that you’re doing things that don’t make any sense at all.
I never found a four-leaf clover, but I’ve found I can save a lot of money by keeping track for a month how much I spend on coffee (about $90) and toilet paper (about $50). Some months I was spending $200 on coffee. It’s not because I drink more coffee or use less toilet paper. It’s just that when you keep track of something, you see what is really happening.
It’s the same with your time: keeping track of where your time goes can reveal how usefully or wastefully you are spending it.
Keeping a spreadsheet of your spending is the simplest way to do this. If you’re like most people, you’ll find that it’s a lot easier to save money when you can see exactly how your spending compares with your goals.
There are three basic things to track: where your money goes, how much you have, and whether you’re saving enough. So to make a good plan for each month before the first, you need to know how much you spent last month and what your income was.
To make a good plan for a year ahead, however, you need to know more than just those two things. You also need to know what might happen that could change those amounts. For instance, if you’re planning how much to spend on Christmas presents, it matters whether your income will be larger than usual because of bonuses received before December or lower than usual because of an upcoming move or other unusual event.
Keeping track of money is a pain, but it’s worth it. You can’t improve your financial situation if you don’t know how much money you have.
Keeping track of money is difficult for two reasons. One is that money comes in many different forms. The other is that it has to be adjusted for inflation.
The first problem just means you have to keep more than one kind of ledger. You might keep your checking-account balances in one place, your investments in another, and the value of your house and car in a third. It’s tedious, but it works; I’ve been doing it for years and I rarely forget how much I have or owe. A simpler solution would be to use a personal finance application like Quicken or Mint (or my own program, YNAB). I used to use Quicken; now I use YNAB, because it handles everything for me without my having to think about where the data will come from.
All these systems boil down to keeping two lists: what you earn and what you spend. That’s what led me to call the system YNAB: “You need a budget.” The Y stands for “your,” the N for “needs,” and the A for “budget.”
People who know how to manage money tend to follow a few basic rules:
- Rule 1: Keep track of your money. Write down how much you make, and how much you spend. (You could use a computer for this; there are programs like Quicken that will keep track of your accounts for you.)
- Rule 2: Make sure to put aside some money for savings. Put it in a bank or another kind of financial institution that has FDIC insurance, so that if the institution should fail, you will not lose your savings.
- Rule 3: Make sure to pay yourself first — set aside some money before you spend anything. Even if you don’t have enough for retirement, save something. And even if it’s only $5 a month, give it to charity. If you do this, and never touch the savings, and invest it wisely, you will accumulate $1 million by the time you retire at age 67.
Keeping a ledger is a way of practicing good accounting. It is also a way of managing your money, and it can be a lot more accurate than simply estimating the numbers. This is something many people do on some level without realizing that they are doing it.
The key to successful accounting is that you have to balance the accounts every time you add something to them. In your checkbook, for example, you don’t add up all the deposits and then add up all the withdrawals; you add up the deposits and subtract the withdrawals every time you make a transaction.
Here is a simple way to keep track of your expenses. Every time you pay for something, write the date and the amount on a piece of paper. When you get home from work, sort the slips into three piles: “Food”, “Clothes”, and “Everything Else”. During the week, put a line through each item as you use it up.
In order to do this, you have to be willing to throw away receipts as soon as you have checked that what you bought was what you intended to buy. You also have to be willing to throw away receipts as soon as you have checked that the prices were what they were supposed to be. Both of these things are very important.
A few people keep track of their expenses without writing them down anywhere, but most people need a written record so they can remember what they spent money on. If you don’t trust your memory, perhaps because it seems untrustworthy, this system will help.
In 1995, a friend of mine from college asked me if he should get a credit card. He wasn’t averse to debt in general, or to credit card debt in particular, but he was averse to bad debt. He wanted to know if a particular credit card was worth getting.
He had read that you should never get a credit card unless you could be sure to pay it off every month. He had also read that you could make money by getting a card with a low teaser rate and then transferring the balance to another card with a lower rate when the teaser rate expired.
I told him not to get the card. It seemed to me that the trade-off between the money he would save by transferring balances and the money he would lose by paying interest and fees was not in his favor: he’d be better off just keeping his money in his pocket.
He took my advice, and never got any credit cards at all. And we were both wrong.