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September 13, 2014 / paulio10

Personal Finance Tracking For Financial Happiness

The idea is simple: watch your personal income and add up your expenses to see how much money you’re gaining/losing each month. Are you actually spending more than you’re making? That would be bad. Are you making more than spending, saving the rest for a rainy day? That’s probably good….

…just not so simple. You can easily add up the bills you paid and the things you bought in the past month, and look at your pay stubs to see your income. But if that’s all you do, you’re not seeing everything.

Obstacles:

1. Annual / Quarterly / Half-yearly Expenses

Examples: car insurance, property insurance, property taxes (paid on houses that have no mortgage), home warranty, annual fees to services like AAA, Costco/Sam’s Club, your 401K manager, tax preparation costs each year, backup services like Carbonite, magazines you pay for once a year, online software services with annual fees like Nozbe, etc.

For annual costs, divide by 12 – add that to your monthly expenses. Because you effectively need to save up that much money each month, to easily pay for that item when it swings back around again.

Example: the home warranty on your house costs $500 per year. $500 / 12 = $41.67 per month of effective cost. If you’re able to set aside $42 each month, that will completely pay for the $500 bill when it suddenly hits you next year.

In fact, you can create an “escrow” account for yourself, maybe in your savings or money market account, so that you can set aside 1 month’s worth of money from each of these yearly / quarterly / half-yearly bills.  Create a small spreadsheet with all of those type of bills on it, add up the annual amount (with a column-summation), and divide that by 12.  That’s the monthly amount you should set aside every month.

You can even figure out how much to set aside per-paycheck, if that works better for you – most direct-deposit systems let you set aside an automatic dollar amount into a savings account, so you can automate this completely.

Then, when you get one of those special bills, transfer the money from savings to checking – and pay the bill!  Zero stress.

2. Credit cards expenses might get counted twice!

For example, let’s say you buy a toaster with your credit card. You enter the receipt into your expenses spreadsheet at home.  But then, when you pay your credit card payment, you add all of that to your expenses, too!  You’ve counted that toaster twice – just not in the same month.

What’s better to do is to record just the interest that the credit card company charged as an expense. Because that interest is completely new to you, it’s the cost of having a balance on your credit card; it’s an extra amount you’re having to pay the credit card company for the right to use their credit card.  Even if you didn’t pay it this month, you accrued that expense this month, so I’d record it for this month. At least that’s what I do.

3. Using cash can make you count some expenses twice!

Withdrawing cash (and entering that in your expenses), then buying something with that cash (and entering that receipt in your expenses) – you just counted it twice!  Instead, you should pick one of those only, and stick with it. Enter only the moment you withdraw the cash OR the moment you bought something. Not both.

The good thing about entering the cash-withdrawal, and not the thing you buy with the cash, is: you can hide the surprise of a birthday gift better that way. The other family member(s) won’t discover what the present is, because it’s not being listed on a credit card statement or in your expenses spreadsheet. But the bad thing is, you probably had to categorize the money withdrawal as something like “miscellaneous” or “other”, so later when you look at your expenses by category, you won’t know what that money counted as.

If you intentionally don’t enter the cash-withdrawal, instead entering the receipts that you got from spending the cash, that makes better categories – maybe 1 cash withdrawal was partly Groceries, partly Entertainment. It’s easier to tell how the money was used at the end of the month.  But it remove s the element of surprise a little bit if the birthday-person uses the same expense-worksheet that you are. Besides, it’s too easy to not get a receipt when spending cash; then you have no reminder to enter that in your expenses – so you spent money that you didn’t track, which is bad.

My suggestion: avoid using cash as much as possible. That’s what I do.

4. Unexpected Expenses

There are many things that can come up in a person’s life that are unexpected, and cost money.

Car repairs, towing, medical expenses, books for work, fines, fees, lab costs, visiting sick relatives, replacing a broken chair/TV/, etc.

These things are often completely unexpected; but if you live a busy life like most people, you can roughly predict the basic amount of those things that are likely to hit you each and every month. Seems like there’s always something.

It’s tricky though – “my car got a flat tire while driving across the desert between Arizona and California and the spare tire is flat too! It had to be towed 85 miles to the nearest gas station for repair! Heh heh, that surely won’t happen again for a long time!” And you’re right, that won’t happen again next month, next year, or any other year for the rest of your life. But something else will. Next month maybe your pet will have a mysterious illness that the vet can’t seem to diagnose (at great cost to you); then mysteriously heal itself 3 weeks later for unknown reason. The month after, your daughter/son/mother/father/brother/sister calls because they’re in a terrible jam, can they borrow $800 for a couple months?  They promise to pay you back (but you know they probably won’t). The month after that, you might fall and sprain your ankle; that incurs multiple doctor visits, pain killers, and maybe some rehab costs; thank goodness for health insurance; and then you’re fully recuperated 6 months later. And life goes on.

Keep an Emergency Fund

To be ready for the unexpected, I recommend building an emergency fund in your savings or money-market account. Choose a level of cash that you’re going to hold in that account as much as possible. Let’s say you choose $5000.

So long as the account doesn’t have $5000 in it, you will contribute a big chunk from every paycheck to it; say $250 a month, or more if you can. A lot more, hopefully.  This is money you will NOT spend under any conditions – unless you have an emergency.

When the account reaches $5000, happy day!  You don’t have to put anymore in there this month – maybe that’s extra play-money for you this month.  Once an emergency hits you though, and the balance goes down, time to start socking away some of that money every month or every paycheck again.

Saving Psychology

This is an interesting psychological exercise, not just a financial one.  Can you get yourself to do it?  Can you maintain that balance?  You have to think differently about your paycheck from now on.  You can’t immediately spend as much money as you do now. It feels different. You can do it. What you’re actually doing is buying yourself peace of mind. It’s a nice cushion if you’re ever let go from your job, too – that’s an emergency (hopefully that never happens).

Is $5000 enough?  Maybe you need $8000.  Maybe less.  Some wise people say you should maintain 3 to 6 months of your normal expenses – but that could be a LOT of money!  I haven’t been able to save that much myself, I set a target for myself of $8000, and I want to increase it to $10,000 next year.  Right now the balance is down around $5000 for reasons I don’t want to go into.  🙂

More Savings Accounts?

By the way you don’t need multiple savings accounts to save for multiple things. You only need one account.

Create a spreadsheet where each column represents one category that you want to save money under. Example categories:

Emergency, Escrow, Vacation, Christmas Presents, Thanksgiving Dinner, Joe’s Birthday, New Laptop

Now, anytime you deposit money into your savings account, put the money amounts in the appropriate columns. Maybe it goes across multiple categories – you just deposited $300 from your paycheck, and you want $100 to go to emergency, $80 vacation, $70 Christmas presents, and $50 to your New Laptop fund (because sometime next year you’d like to buy a new laptop).

Now, when you buy that new laptop next year, you won’t have to charge it to a credit card – you magically have the money waiting for you in your savings account.  You’ll be saving yourself all the interest from not having to pay the Credit Card Company lots of extra money every month for the next few years or so. You’re basically paying monthly payments NOW, before you buy it, instead of after; and you’re paying yourself — nobody can charge you extra to do that. You will have extra cash in the future because you’re not buying into the bullshit of credit cards that our society loves so much. You’re your own credit-card-company this way. Money will feel a little tighter for you now, instead of a LOT tighter later when you have a higher credit card payment. You’re also lowering your personal danger of bankruptcy – by not increasing your debt and monthly payments, from the viewpoint of the credit bureaus.

I’m not saying that credit cards are evil – they serve a purpose. They can be your emergency backup if you ever run out of cash. But most people use them way too often, and pay exorbitant “interest” costs without realizing it. Why should you pay someone else “interest” when you could keep it, and spend that money on ANYTHING ELSE you want to?

What Software Should I Use To Run My Finances?

You don’t have to buy anything – you just need a spreadsheet, and there’s a variety of free spreadsheets today, including Google Drive’s spreadsheet system. You can do this all from your home computer, or possibly even from your cell phone, at this point. You can pay almost all of your bills online these days, including transferring money between bank accounts without having to visit the bank, and even sending money directly to friends & family online.

Congratulations, you’re more financially stable now.

Making Adjustments

With practice, you’ll see if something’s not working. If you constantly run out of money on the 25th of every month when trying to pay your bills, something needs to be adjusted. You have the tools now to find it and fix it. Another annual bill hit you that you forgot about? OK, paying that was painful just now. Dang it. Let’s set this up so it’s never painful again. Add it to your Escrow calculations; how much more do you need to set aside now? Do it. Next year this bill won’t hurt, because the money will be there, unlike this year.

Keep making adjustments as you need to, and the stress points will eventually all be gone.

Not Making Enough Money

If you discover that you’re spending more than you’re making, this is a very dangerous situation to be in – I fear for you. You should be shocked and on high-alert. It’s time to make a change.

The first step is to immediately reduce your expenses. Find what you can trim and shrink, that you’re spending money on every month. Look thru your credit card statements, is there anything that shouldn’t be there? Particularly payments that happen on every statement, like game companies that are charging you for some old game you don’t play anymore. Put a stop to it.

Trim down your expenses, stop the leaks, and then next month, do the same thing again. But you should also consider: can I make more money? Is there another company that will pay me more for doing the same job? Can I get a better job? Don’t get stuck in the rut of thinking your time is only worth so much. It’s a lie. When I was in college I did some computer typesetting for someone at $5/hour, because I thought that was the only thing they’d pay me (minimum wage was around $3.50/hour back then). My friends said I was stupid, I could easily get $15/hour for that work. So the next time someone wanted a book typeset, I was scared, but I said my rate was $15/hour. Without batting an eye, the customer was happy to pay me this higher rate!

Decades later, when running my own computer consulting and web development business, my standard rate was $75-90 per hour; for emergencies, which many customers seemed to have, I charged $125 per hour.

People paid this to me again and again.

For each hour of my work.

There is no limit to how much one hour of your time is worth. You could make $2,000 per hour, if your service is in high enough demand. It’s the same hour, for you, either way.  Especially if you live in the “free world” – there are many ways to increase your income! Find them.

Peace of Mind – Paying Bills Can Be Fun

When you truly understand your expenses, and budget properly for the way your life works, paying bills can actually become fun. I enjoy paying my bills very much. I often pay them as soon as they come in. It feels powerful, because I’m directing energy (money) towards the things that are important in my life. And I’ve set up a system for myself so that when I need the money, it’s there. Either my paycheck pays for it, or my escrow account pays it, or my emergency account pays it. One way or another, the money’s there – I only have to remember to make adjustments in the future (add more or less to my emergency fund as it goes up and down; annual bill changes affect how much I put into my escrow account each month; etc.)

 TL;DR

If you want peace of mind with your home finances:

* figure out what you’re truly spending money on every month – don’t forget about annual/quarterly payments; beware of counting certain things twice.

* compare your expenses to your income, make sure you’re not spending more than you’re making! It happens.

* keep some money from every paycheck in your own “emergency fund”, for emergencies only.

* keep some money from every paycheck in your own”escrow account”, to pay those irritating bills that hit you only once a year / quarter / half-year.

Can you control your expenses, and track your income & expenses? I dare you! You can do it.

You will have a more stable & happier life from this.

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