After deciding that it’s time to get a handle on your finances, find a way to accurately track the way you handle everything involving money. Before deciding to take action, you may have estimated your income and expenses, but now the details matter. Here is how to get to the details.

Every cent is important at this point. That will change later on; as you grow as a master or mistress of your money, you can ease the pinch on the penny. But in the beginning of this journey, you should record everything. From the $5 check from your grandmother on your birthday to your $75,000 annual performance bonus, and from the $1.99 music download to the $28,150 car, you must write it all down in some form.

There is a purpose to this madness. By tracking every detail of your money, you get a real picture of how much you’re spending. Many people don’t know off the top of the head how much they spend on lunches with coworkers every month or how much they spend on cigarettes or coffee. This process can be very enlightening, and in some cases, it might provide motivation in itself. By tracking your finances accurately, you’ll be poised to make better decisions about where to spend your money.

You don’t need to start with fancy software. Sometimes, low tech can be most effective, especially when starting out. Pads and pencils are portable as well, and they are great tools for keeping track of your cash spending while you’re on the move. The first step is to choose the method that will work best for you.

Desktop software

Intuit Quicken is the king of financial tracking software. Unfortunately, the software is not cheap. Quicken 2009 Deluxe, the most basic version available this year, costs $45 through Consumerism Commentary. You can connect to banks to download your deposits and withdrawals and credit card companies to download your charges and payments. Microsoft Money Plus is another option offering similar features. Both of these programs cost money to use. For those who don’t use Windows-based computers, MoneyDance is a good choice, but this software is not free, either.

If you’re looking for software that is free to use, take a look at GnuCash. GnuCash also has a portable edition which allows you to take your financial data with you and access the program anywhere you can jump on a computer. (Thanks to Dave Stinner who reminded me about Gnu Cash.)

Web software

Quicken Online Edition is now free. Here’s a review of the service. Mint (reviewed here), Geezeo, and Wesabe offer similar features to help you track your money.

While web software offers seamless integration with online access to your banks, it has some limitations. These web applications are not designed to keep track of your cash spending, which may be the most important requirements for accurately tracking your expenses.

Mobile software

Keeping track of the money you spend while you’re out is a challenge, at least for me. It helps to ask for receipts for all transactions so you can collect them and record the amounts at night when you’re home. I’m experimenting with software for mobile phones that allows you to keep track of your spending. SplashMoney works with my BlackBerry as well as iPhones. For Quicken users who enter transactions while away from the computer and sync them to desktop Quicken later, Pocket Quicken may be a good option. This software runs on Palm and Windows Mobile devices.

Paper

For people who prefer old-fashioned methods and have unlimited filing space, paper accounting is an option. Download this ledger paper and print a few pages. Use a separate page for each account, and keep track of your transactions just like you would with software. If you don’t like my ledger paper, try these templates, available for free.

Tips for accurate accounting

• Collect receipts for all transactions, including the purchases using cash. “Cash” should be an account in your software or on paper. Your starting balance is amount of money you have in your wallet on the day you begin tracking.
• If possible, keep notes about your expenses while you’re away from your computer or desk. Carry a small pad or use mobile software like those listed above.
• Every month, or more often if you have online access or automatic transaction downloads, compare what you record with the activity your bank has recorded in their systems. This “reconciliation” ensures you have accurate records for your bank accounts, investments, and credit cards.
• The web software listed above usually download your bank activity automatically. In some cases, the application will try to categorize your spending based on the vendor name or similar transactions by other users of the software. This “artificial intelligence” will make errors, so review every transaction to categorize the expenses and income properly.
• ATM withdrawals should be recorded as a transfer between your savings account and your cash account, not an expense. Cash deposits should be transfers as well.

As time goes on and you become more familiar with your finances, you can afford to be less aggressive about recording every cent. I suggest following the above suggestions and keeping track of everything for at least several months to get an informative view of your money.

If you have any additional tips for tracking your money accurately, please share.

Image credit: Refracted Moments

Nicholas emailed me with this question.

I’m trying to find some kind of free accounting software for balancing my checkbook, and that sort of thing. I already use Mint.com, but it isn’t much good if I plan on writing a check, or if I want to create a recurring transaction.

I don’t need something to actually connect to my bank account, although it would be convenient to be able to import transactions. I just need to be able to keep track of everything. Right now I’m using Excel, but Excel really isn’t meant to be this kind of tool. I’d appreciate any recommendations you might have. Thanks!

Nicholas is right about Mint, Yodlee MoneyCenter, and other online services. These websites rely on downloading information from banks, and banks don’t know when you write a check unless you have sophisticated business services. For Nicholas’s purposes, these services fall short.

If Intuit Quicken and Microsoft Money Plus are out of the question—and Nicholas’s requirement according to his email is free—then there aren’t many solutions available.

I would suggest GnuCash. GnuCash is free accounting software available for Linux and other flavors of Unix, Mac OS X, and Microsoft Windows. Like Quicken and Money, GnuCash allows you to track your financial accounts, including cash, credit, and investments.

Unlike Quicken and Money, the designers of GnuCash take an approach more true to professional accounting principles like double-entry accounting. While the more popular (and more expensive) software programs use “accounts” to represent assets and liabilities and use “categories” to record expenses and income, GnuCash considers assets, liabilities, income, and expenses to all be accounts. That means that every transaction is recorded as a transfer between two accounts.

It’s a little weird at first, but it begins to make more sense as you have more practice.

GnuCash will let you easily track your checkbook. When you create a new book of accounts (which GnuCash calls a file because the database is stored in a computer file), the default options include a checking account. You can use the default checking account, or add more if you have more than one to track, to keep your checkbook up to date.

When you write a check, you could record a decrease (GnuCash calls this a “withdrawal”) to your checking account and an increase (GnuCash calls this an “expense”) to the appropriate expense account, such as your telephone expense account. In this manner, your checking account in GnuCash will always match your checkbook. You will be able to see at a glance how much money you have truly available in the account, to help prevent overdrafts.

The problem with tracking a checking account is the reconciliation between your book of accounts (ledger) and the bank statement. If you have outstanding checks—checks you have sent out but haven’t been cashed by the recipients—then the balance in GnuCash won’t match the balance at the bank.

While the above method will be fine for most people and has the benefit of tracking the usable balance in your checking account, if you want to keep a true reconciliation, then you need an additional account. The other option is to create a liability account called “Outstanding Checks.”

When you write a check, record an increase to Outstanding Checks and an increase to the appropriate expense account, perhaps the telephone expense account like above. Then, once the phone company deposits your check and your bank has decreased your balance, you can record a decrease to Outstanding Checks and a decrease to your checking account.

Both options are accurate, so it’s up to you which method to use. If you download GnuCash, both options are free as well. GnuCash does more than just balance your checkbook, as well. It does more than you might expect from free software. Here are some of the features you might find useful:

• QIF and OFX support, so you can download files from your bank and reconcile your accounts
• Schedule recurring transactions
• Track your investment accounts and download stock prices
• Use multiple currencies
• Generate reports and graphs to illustrate your finances

There’s one drawback. If you want to run GnuCash on an operating system other than Windows, you’ll have to “compile” the software yourself. There are instructions for installing and using GnuCash here.

As I mentioned briefly, I was in San Francisco for a few days to meet with software developers and strategists from NetworthIQ, ExpensR, and MyStrands. The companies are working together to develop web-based personal finance management software, with the intention of meeting customers’ needs that are not met by Mint, Geezeo, Quicken Online, and others. The companies invited a number of bloggers who write about personal finance to share their experiences and needs with each other.

This workshop gave me the perfect opportunity to meet many of the writers I’ve been working with for several years. Not only did we discuss financial software, but we also got to know each other quite a bit and share blogging tips and tricks. However, the main questions of the day pertained more to financial management software.

I would have to say that personal finance bloggers are not the typical consumers. For example, I track my finances in great detail—though less detail than I did six years ago—using Quicken’s desktop software. Several times a week, I update my transactions and reconcile my accounts against information downloaded from my banks, and once a month, I review my reports to get a good handle on the bigger picture. I do not want to spend any more time than I do now, especially if it involves categorizing my expenses. Software like Mint (reviewed here by Sasha) and Quicken Online (previewed by me) will connect directly to your bank for downloading your transactions and attempt to categorize your spending based on patterns, but this system is not perfect and requires significant manual correction.

Additionally, for most people, the information downloaded from banks does not create a full picture of spending. Although more spending takes place through electronic transactions, cash still plays a large role. Software must include a way to enter cash transactions, not downloadable from any bank. In order to save current Quicken users from expending more effort, I suggested allowing the new web software to “plug in” to existing desktop software. This would allow users like me to take advantage of some of the planned “Web 2.0” features, like “social networking” and cross-segment comparisons.

All the bloggers had great suggestions for what we’d like to see, but the big questions are how to make personal finance mainstream and what would the most people want to see as the 21st century brings technological advances. So this leads to one question for readers, particularly those of you who think outside the box: What do you want your personal finance software to do and how does that differ from your existing solution?

I recently wrote about some changes coming to the presidential dollar series released into circulation by the U.S. Mint. Jeremy asked:

My wife and I received two fancy rolls of uncirculated coins of a 2007 series in a plastic display case as a gift this Christmas. For now they are just going to sit in the safe deposit box at the bank, but I wonder if they will ever have some sort of added value. Flexo, do you think these will ever have any sort of collector’s value (baring mistakes, die errors, etc)?

Collecting coins is fun, if you’re into that sort of thing, as I am once in a while. I don’t do it for the money, though. In most cases, trying to make money with a coin collection is speculation worse than day trading. Think about when you used to collect baseball cards. Chances are that if you did, you were doing so at the same time I was, in the late 1980s. Everyone was collecting cards at that point, or so it seemed. Supply was through the roof, and then when baseball started losing favor with Americans, demand dropped. So much for the value of late 1980s baseball cards.

Coins are similar. To answer Jeremy’s question, you’d have to take into account four main considerations that go into the “value” of a coin at any moment. If you want to see what the market is supporting, check recent successful eBay sales. But why is a 1955 cent worth more than $47,000 while an 1815 quarter dollar only $95?

Factor 1: Condition

There are two major components of condition, and the first is pre-circulation. Everything that happens to the coin while at the mint, including the way the design is struck on the planchet and marks left by other coins during transportation, plays a part in determining the condition of the coin. If the coin is circulated, then wear and tear plays a roll.

Several companies take the guesswork out of rating the condition of the coin, for a fee. They will grade the coin on a scale of 1 to 70, with 70 being practically perfect, and place the graded coin in a display holder that will hopefully prevent any future damage. The better the condition, the higher the value.

Factor 2: Rarity

Most modern coins will never be rare. These days, there are many collectors and the mint produces many items of each type of coin being produced every year. If you’re collecting coins for investment potential, modern coins are not good bets, unless you have a true rarity such as an error coin. That being said, a coin’s old age doesn’t correlate to rarity. Some older coins are more common that recent pieces. The higher a coin’s rarity, the higher the value.

Factor 3: Bullion value

Coins are generally composed of at least one type of metal, and that metal has a market value. For example, silver is currently $15.35 an ounce and copper is currently $3.1608 a pound as I write this article. A 1960 quarter dollar was composed of 90% silver and 10% copper. Multiply the price by the weight of each metal in the quarter, and you’ll find that the bullion or melt value of a 1960 quarter is $2.7804. For the most part, you should be able to sell a coin for at least the bullion value. Coinflation will tell you the metal content of U.S. coins and give you bullion values based on the latest market prices for the composition metals.

Factor 4: Demand

Ah, demand. Without demand, coins would fetch only their face value. That same 1960 quarter could only be used in financial transactions and would be worth no more than $0.25. Demand for various coins ebbs and flows as tastes change.

I can’t predict whether any particular coin will be in demand in the future. It’s likely that most modern coins won’t be hot among collectors thanks to their overabundance. But the coming changes to the edge of the coin may make the earlier series more desirable. Unfortunately, many of the early presidential dollar coins didn’t leave the Mint without unattractive damage. (See the first consideration of “condition.”)

The coins that Jeremy has are uncirculated, which means they may be in better condition than average. The best bet might be proof coins, which go through a special process to ensure that they remain in excellent condition throughout the minting and packaging process. Proof coins look much different—shinier and stronger—than circulated (“business strike”) and other uncirculated coins. If any coins have the ability to increase in value, it’s the rarer proof versions of these coins.

On the other hand, proof coins are hoarded among collectors. Secondary demand (after the initial demand during production, when collectors can buy directly from the Mint) will remain low for a while.

Rather than worrying about these factors, it’s much more enjoyable to collect for fun. If you want to put a value on your collection, check out from a library the 2008 Guide Book of United States Coins, also known as the “Red Book.” Another good source of coin values for those who prefer to do their research online rather than the library is the PCGS Price Guide.

There’s some news about the relatively unpopular “presidential” golden dollar coins. I’ve been using these coins almost every day, but I have not run into anyone else doing so. Most people I know haven’t even seen the coins. If you want to pick them up from the bank, pay attention to the release schedule:

February 14: James Monroe
May 15: John Quincy Adams
August 14: Andrew Jackson
November 13: Martin Van Buren

Here’s a chance to look at the four obverse designs representing U.S. presidents five through eight.

Currently, the “In God We Trust” motto appears on the edge of the dollar coins. This is an interesting idea, but I can’t say I am a fan. The edge lettering just doesn’t seem as solid as lettering on the obverse or reverse. Other people apparently had their own problems with the relocation of the motto. I’ve received forwarded junk email stating incorrectly that the “In God We Trust” motto was missing from all dollar coins as the result of some (non-existent) political God-elimination scheme. That rumor as we know is completely untrue, but a small amount of error coins struck without the lettering surfaced. Some individuals have vandalized coins to make “fake errors,” as well, but there was no underground governmental desire to remove “In God We Trust” from the coins.

Now, here is the news. The motto will be moving to the obverse of the dollar coins in 2009, while the date and mint mark will remain on the edge. This change could possibly increase the demand for earlier dollar coins from 2007 and 2008, at least among collectors, due to what will eventually be the “rarer” configuration with the motto on the edge.

Speaking of design changes, I hope that at the conclusion of the presidential dollar series, all presidential portraiture designs are retired. When designing the original American coinage, the founders wanted to stay away from honoring political leaders—it reminded them too much of the kingdom from which they were trying to separate. Let’s get back to having attractive and artistic representations of Liberty on our coinage rather than dead people.