The first article in my series on living well, without breaking the bank.
While getting budget in place is very important to getting your finances in order, I think there's an even more important first step. Finding out where you're already spending your money.
There's a number of tools available for this. For the most part, I'm going to discuss Intuit Quicken, as it's the software package that I've been using since I was a teenager. There are however, some other options, some free and some not, and the same principles can be applied to them as well. If you are interested in buying Quicken, the $40 version will do nicely for our purposes, but the $93 version adds better investment management tools - as well as some basic small business tools - if your finances are more complicated than just cash and loans.
The goal in any financial tracking program is to track where your money is being spent based on broad categories, and where your net worth is headed. This information lets you 
know whether your current spending habits are acceptable, and also gives you a baseline to start on a budget. The simplest approach to tracking spending is to move all your spending onto a credit card that offers a spending report. There may be others, but I am only familiar with CIBC's program...any credit card with them will assign your spending to a category based on what store it goes to, a sample is shown to the right.
This approach has some failings. It does not track any spending that comes directly out of your bank account, and this might cause you to think of cash spending as "not really spending." Indeed, it only tracks a single account, so can make it difficult to tie together your total financial picture. Also, it relies on using a credit card, which can be an expensive option if you ever forget a payment or don't pay the balance.
For these reasons, I prefer the hands-on approach of a separate software program into which you enter every transaction as it happens. This gives you up to the minute data on your financial situation, which can help in making purchasing decisions. It also allows you to track all of your spending. I have discussed Quicken above, the other big commercial player is Microsoft Money - though I discourage that as I've had nothing but problems whenever my grandfather upgrades to a new version - and there are some free options such as Gnucash, Buddi, and Clear Checkbook. Unfortunately, some of the more feature-heavy online providers , like mint.com and Quicken Online, are geared specifically to the American market. I have yet to sample any of the free offerings, though product reviews are now on my to-do list.
Setting up your categories
Once you've picked your software, you need to figure out what categories to track. I suggest keeping the list to a manageable length, but still detailed enough to know where your money is going...if a catch all, misc category represents more than 2-3% of your monthly spending, you're probably not detailed enough. Also, while Quicken encourages you to set up all the details of your paycheck, I'd suggest that uncontrollable expenses like taxes and benefit deductions represent noise that will get in the way of figuring out where the money you actually have control over is going.
The big categories are easy - housing expenses, utilities, groceries. It's the smaller ones that bear some thought. Do you want to track how much you spend on your car, or is it more useful to know how much you spend on all forms transportation. A good software package should allow you to group expenses under a parent heading, so you can get more detail in your reports if you're interested. The end result is the same categories as you'll put into your budget later, so make sure they're relevant.
That's it, that's the tracking system in short. What remains now is to use it. I've made it a habit, that when I come home each day, I'll take any receipts out of my pocket and put them in the system. Takes about 5 minutes, and gives me an up to the minute picture of where I am that allows me to make intelligent spending decisions the next day. In the end, that what it's all about.
Next time: using your categories to make your budget.
No comments:
Post a Comment