Do you handle your family’s financials? Are you the one balancing the checkbook each month (do people really still do that)? How do you know where you stand from day-to-day with your finances? In case you do the bookkeeping, do you still use pen and paper and a truck load of receipts to do that? In IT age, old style bookkeeping is obsolete.
Bookkeeping as an activity always was and still is an important aspect of managing personal finance. Keeping track of earnings and spending are two most important aspects of managing personal finance. This post is not about managing your household books electronically with the help of modern software tools which will make your job easier and less time consuming.
I manage our books and keep track of every cent we earn and we spend. I use Personal Capital to manage it for us. You can use Mint.com or any other software/application you prefer.
Now a days there are various personal budgeting software that can do all these for you. You don’t have to be computer savvy, if you can write emails, you can also use computer software for your household book keeping.
In the traditional bookkeeping system, you needed to sit with all your spending bills and receipts, you needed to write a lot of things on paper, you needed to calculate, sum, subtract, multiply and what not.
Now a days, you need to know how to reach to the page where you’ll see all of your income and expenses. You can even set budget and compare between budgeted spending vs. actual spending. I will put some screen shots (with figures obfuscated to protect my financial numbers from becoming public) to explain the steps.
Essentially, you can manage your household finances like a small business, and that too without cost (no cost if you use online accounts, nominal cost for some stand alone software packages).
The screens here are from Yodlee. Mint.com has very similar and some more advanced features.
If you don’t have a family, it’s really pretty simple to know whether you have money or not, but if you are handling the finances for 4 other people and yourself, this can get quite complex sooner. So what can you do to simplify the process and make sure that you’re not missing anything?
Essentials for Modern Bookkeeping
I will not ask you to bring a pen and piece of paper along with the bag full of grocery bills and restaurant receipts. All I would suggest that you open another browser window and type in the tool you’ll use to book-keep your finances.
But, before you do that, lets talk about what you’ll need to do for bookkeeping using a finance software.
1) Use Financial Software – I use Yodlee Money Center, as stated earlier. I have a couple of friends that use QuickBooks and they love it, I can also vouch for Mint.com, which is quite user-friendly as well, and it’s completely free (and secure)! Either of these mediums will do their best to categorize your expenses for you, which makes life a million times easier.
For example, if you stop at the gas station on the way home and put $40 of unleaded in your car, your finance software will have already categorized that expense to your “Gas” category by the time you get home. Each month, you just have to do a little bit of cleanup and you are completely ready to analyze your income and expenses for the month.
2) Check Your Income – For many people, this is probably the easiest part of their finance leg-work because they get a paid a salary that goes unchanged each month (except for those magical months where you get paid 3 times instead of just twice).
Just quickly take a look at your income and if it looks correct, you can move on. If, however, you have some income each month that is unpredictable, double check these values against the work that you’ve done (most likely on a side-business) and if it also seems reliable, it’s time to move on!
3) Check Those Expenses – this is not nearly as simple as reviewing your income since there are many more transaction in your expense category, but start out by taking a look at the overall value. First of all, this expense number should be lower than your income (we want to earn more than we spend).
Secondly, rather than reviewing each expense separately, create a budget category for each expense and review them as a whole.
For example, you expect to spend $200 each month on gas, $400 on food, $70 on car insurance, $875 for the mortgage, and so on and so forth. If a category seems out of whack, then you can dig into the numbers and see what created the discrepancy.
You can also see the spending pattern over time. If your goal was to limit dining out, you can instantly check the spending on restaurants over months or quarters or even years. If you are unknowingly spending too much on a particular category, it should be identified easily.
4) Net Income (Cash Flow) – Ultimately, your personal finances shouldn’t really focus on income and expenses (although they are important tools to your end goal). You focus should be on your net income – your total assets minus your liabilities. In other words, these are all of your possessions minus the debt that you owe on them.
So, if you own a house that’s worth $300,000 and you owe $250,000 and have no other assets or liabilities, then you have a net worth of $50k. Each month, you’d like to see this number on the rise.
Your investment accounts should be increasing in value, your debts should be going down, and perhaps your asset values are going up. Everything should be leading you toward a higher net value, which will be heading toward your financial goal. Most of the financial software out there should do this for you.
Pay attention to that number and do you best to always keep it going up!
The best thing about modern bookkeeping is you can be alarmed automatically before you sit with the numbers at the end of the month. Any time your spending on certain item or category exceed the pre-set limit, you’ll get emails automatically from these software.
Now, select your software and start bookkeeping. As I am doing, you too can say ‘No’ to the electronic receipt at the cash register, unless your paying with cash. As long as you use your cards to pay for the items, records are maintained in the online bookkeeping software like Mint and Yodlee and many others.