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Take Control of Your Finances Part 8: Set Savings Targets

by Flexo on December 15, 2008

in Money Management

Last week, I wrote about the importance of setting real life goals in order to take and maintain control of one’s own financial condition. It’s important to break past the idea that a life goal is based on money. For example, entering retirement with $4,000,000 is a good target, but it’s not a major goal. Your goal is the purpose for earning that $4,000,000. What do you want to do with that money? Is your goal for life to retire comfortably in a location with a low cost of living? Is you goal to provide financially for your family? Or is your goal to have an effect on some issue that you care about?

The life goals define your savings and investing targets. How much money will you need to achieve your goal in the manner you wish to achieve it? This will vary from person to person, even when the goals are shared. Three people might have the same goal, for example, to promote financial education for teenagers. One person may wish to achieve this goal by creating and managing a charitable foundation, another would prefer to become a public school teacher, while a third individual might choose to write a personal finance column. Each path, inspired by the same mission, requires significantly different financial obligations.

Long-term savings and investing targets

Ideally, determine your goals while you’re still young. The earlier you start to work on a goal, the more time you’ll have to meet your financial targets. (Also, if you decide to change your goal while on your path, you’ll have more flexibility to change course.) In reality, there is rarely enough time. With time on your side, you can afford to be more conservative with your investments in order to reach your goal, but the urgency of a short time horizon requires you accept more risk or work harder to raise the money you might need.

While in an earlier article, I warned against using the “SMART” model for defining your life goals. But now that you have your mission out of the way and are focusing on the financial requirements for achieving your goal, it helps to keep your targets in perspective. Your financial targets should be specific, measurable, attainable, relevant, and time-based. For example, if your ultimate mission is to support arts education in your town and your path for achieving this goal involves establishing a scholarship for college-bound students attending your local high school, your SMART target may be to set aside $1,000,000 within five years. The interest earned on that money can then be used by the school to fund each year’s scholarship. This sets a specific, measurable, relevant, time-based target for reaching your goal. If your income level allows you to save $200,000 above your other expense and savings needs each year, or if you currently have investments that might appreciate to this level, this target is attainable.

Short-term savings and investing targets

If you haven’t already achieved a comfortable level for your emergency fund, that should your primary short-term financial targets. This is a key component of a financially stable lifestyle, regardless of your long-term goals. Here are some resources about emergency funds.

Other short-term financial targets depend on personal needs, outside of your larger mission. You may want to dedicate your life to saving feral cats, but you’d also like to own a house. To purchase a house responsibly, you may need to provide 20% of the purchase price at the time of the sale as a down payment. If your mission is to help search for forms of life in other galaxies, you will need to earn a college degree or two. Enrolling in college requires some financial consideration, and the requirement is much more immediate.

If you’ve determined that you have ten years to raise $1,000,000 to start a foundation, you can set short-term targets to maintain your focus. The targets might not be achievable if evenly spaced, such as earning $100,000 per year. The achievement of a goal such as this might require a slow start and using compounding interest to your advantage. You need to consider the specific financial tasks you need to accomplish in order to start a foundation with $1,000,000 within ten years, such as fundraising among friends and family.

High-yield savings accounts should be part of your short-term targets. This is one of the reasons I still enjoy ING Direct despite the bank’s slightly lower interest rates than those offered by other online banks. It’s easy to split your ING Direct savings account into sub-accounts, each designated for a specific target.

Using short-term and long-term financial targets will help you stay on task as you reach to achieve your missions, but don’t be afraid to change your plans. The experiences you encounter while on your path might point you to an idea you hadn’t considered originally, reshaping your mission or changing it entirely. If that happens, you may need to revise your expectations and targets. The mission sets a guideline for living your life, but it’s this living that is the important part, not reaching a specific goal.

Here is what we’ve explored on Consumerism Commentary in terms of taking control of your finances so far:

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Take Control of Your Finances Part 7: Set Goals

by Flexo on December 8, 2008

in Planning

Last month, I began writing about the process of taking control of one’s own financial condition. It’s common to outline any process by describing a series of steps, and that is the form I have chosen for writing about this particular process. The steps I’ve described roughly follow my experience as I learned to take responsibility for my money, or lack thereof.

Most recently, I wrote about step 6, getting out of debt. Eliminating the money you owe to other people and companies is a process in itself. Although I’m describing this process of a series of steps, it is not necessarily necessary to wait until one step is completed before beginning the next. This next step is a good example.

If you have debt, you can begin the next part of the process, setting goals, before you finish paying what you owe. You might believe it’s late in the process to start talking about goals, since you may have heard somewhere that it’s “wrong” to attempt to start a process without clearly defined targets. I disagree. No matter where you are going, everything I’ve written about so far in this series applies in the same way.

At some point, it’s important to ask yourself why. Why bother taking control of your finances? Why focus on saving and investing as much as your income as possible? Why think about ways to earn more income? The obvious answer is to grow your net worth. It can be a challenge to find a deeper answer, but usually there is something.

SMART goals are not so smart

If you’re involved with business management, you’ve probably heard about “SMART” goals. I’ve written about the “SMART” concept on Consumerism Commentary, most recently when I formed my financial goals for 2008. To be “SMART,” a goal should be specific, measurable, attainable, relevant (or realistic), and time-based. For example, earning $10,000 in sales commissions during December could be a “SMART” goal for someone.

Forget about “SMART.” It focuses on nothing that will help you yet. Rather than trying to determine how much money you want to have, start thinking about what you’d like to accomplish within your lifetime. Don’t be specific and don’t concern yourself with whether the goal is attainable. A good life goal will set you on a journey, and the journey is more important than the goal itself. On this journey, it’s common to discover new aspects of yourself, and these aspects will sometimes encourage you to change your goals. That’s nothing to worry about.

Your goal should be less like one a business might have and more like a mission or a vision, though it doesn’t have to be lofty. Here are a few examples.

  • Help alleviate global hunger and poverty
  • Encourage arts education
  • Bring peace to the Middle East
  • Provide every opportunity for my family

Long-term goals vs. short-term goals

Look at the big picture. Decide what your place in the world might be. Once you set a major life goal, you have a direction for your first few steps. Your goal might change, so be flexible. But until then, make every decision with this long-term goal in mind. Your life goal may manifest itself in different ways. For example, if your goal is to encourage arts education, there are many paths you can take. You could earn a degree in education and become a teacher. You could start a foundation that offers grants to programs that promote arts education. You could be a financial planner who donates some amount of money to an arts organization every year.

Any two people could choose drastically different paths with the same goal in mind, and the path will have more of a bearing on your short-term financial goals than the destination. The teacher will need to find the money to enroll in a college to earn a teaching degree. The person who wants to start a foundation might have to start with $1 million or more.

If visualization is motivational, consider writing goals down. To follow a standard form, write your long-term life goal at the top of a piece of paper. In order to achieve that goal, understanding that you might never fully achieve it, what are some of the smaller milestones you must achieve? For example, the teacher must earn a qualifying degree. He must also earn a teaching certificate. The individual who wants to help bring peace to the Middle East may want to earn a degree in international relations and be elected or appointed to a political position. Each of these accomplishments consist of another level of goals.

If this structure is beginning to sound like an outline, that may be the form your goals should take on paper. Each larger goal requires a number of smaller goals.

We don’t need to think about finances until we get to the lowest level. I’ve heard people say, “My goal is to earn $1 million by the time I’m 30 years old,” and I want to get away from that type of thinking as much as possible. Money is not the goal; money is only a tool that can be used to help you reach real goals. For example, one of the sub-goals involved in becoming a teacher is partaking in an accredited college program that offers an education degree, either a bachelor’s degree or master’s degree depending on your needs, at completion. In order to receive this education, there are additional sub-goals, including the ability to afford the education. The money might come from loans, scholarships, fellowships, grants, or your own income, but this is where finances finally come to play in process of setting goals.

Everyone has a life goal. It may be a calling, like helping to cure AIDS in Africa, or it may be a personal goal to be the best mother you can be. You can consider this your mission. Without defining one (or more), financial goals have no context. Money is nothing by itself. Getting out of debt is a goal, but only so far as it gives you the flexibility to use your money for a better purpose. What’s yours?

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Take Control of Your Finances Part 6: Get Out of Debt

by Flexo on November 21, 2008

in Debt Reduction

Debt is like indentured servitude. You work and earn income, but you hand over that income to someone else. With debt, your finances are controlled by someone else, not you. For example, credit card companies have the right to change your interest rate at almost any time with advance notice. In fact, CitiGroup recently raised its interest rates on a wide swath of customers to help bring in more money to this failing company. High interest rates cause customers to take longer to get out of debt because a smaller percentage of their payments goes towards the principal balance. In this case, CitiGroup is controlling a portion of your finances. If a Citi customer is accruing more debt on the credit card at the same time, CitiGroup’s control outweighs the customer’s.

Credit cards aren’t the only forms of debt. Mortgages and student loans prevent people from saving as much money as possible, so even before you make decisions about life goals, it’s a good idea to start eliminating these debt as well.

Good debt versus bad debt

One comment you may hear is that mortgages and student loans are “good debt” while credit cards and car loans are “bad debt.” The philosophy here is that houses appreciate in value, so mortgages provide “leverage,” allowing you to risk less of your own money for a greater return. Similarly, a college education allows you to earn more money in the future. In reality, houses do not always appreciate in value, especially if you consider how house-related expenses contribute to the true cost of owning a home. Also, not everyone earns more with a college degree than they would without one, but on average, those who do earn more over their lifetime. It is possible, however, to earn a college degree without going into debt.

On an individual level, you can’t use generic labels like “good debt” and “bad debt.” If you are accumulating more debt, all debt is bad. If your debt is not increasing, you have the option of weighing your debt to determine which to pay off quicker. For example, at one point, it was common to have student loans with interest rates under 3%. At the same time, high-yield savings accounts paid over 4%. Even after taxes, it was worthwhile — if the student loan was the only debt — to put extra money in savings while making only the minimum payment towards the student loan. That is not always the case, particularly now that savings interest rates are lower and student loan rates are higher.

Now just get out of debt

Getting out of debt is a six-step process, with one extra preliminary step.

0. Put $1,000 aside. You should be spending less than you earn by now, so you have excess income at the end of every month. Start putting aside some money for emergencies even before you start paying off debt. $1,000 is a good target, but you shouldn’t wait until you reach that point before moving on to the next step. The purpose of this money, which will eventually become your “Emergency Fund,” is to allow you to dip into the savings if a problem comes up. Rather than paying for the surprise expense with a credit card, you have a little accumulation set aside. If you already have a savings account set aside for this type of expense, move right to Step 1.

1. Commit to avoiding new debt. You’ve already committed to taking action to take control of your finances, but in order to do that, you must eliminate your debt. While you have debt, you don’t get to use a portion of the income you earned. You already used income you didn’t have, allowed someone else (a lender or a credit card company) to cover the expense for you, and now they own you (or part of your income). Until this relationship is eliminated, do not accumulate more debt. Do not spend more than you earn by using credit cards. Don’t buy a new car if you don’t have the savings. Once you’re out of debt, you can carefully ease these restrictions, but the object is not not get into debt while you’re going through a process of elimination.

2. Call your creditors. There is no harm in calling the credit card companies to ask for lower rates. The customer service phone number is always printed on the back of credit cards, and this is your first point of contact. Historically, people have had success calling customer service and asking for a lower rate. With the economy deteriorating and many banks and credit card companies struggling, it might be tougher to get them to budge on your interest rates. If at first you don’t succeed, ask for a supervisor. Call back, if you have to. In some cases, the banks will offer to lower your rate if you close your card. That means you will pay less to get out of debt and you’ll be restricted from using that card for more purchases. Take the deal! You won’t be using your credit card again until you’re out of debt, anyway.

3. Choose how to pay back your debts. If you want to spend the least amount of money and least amount of time to pay back all your debts, there is only one option: the Debt Avalanche. It’s kind of like Dave Ramsey’s “Debt Snowball” on steroids. The main difference is that the “Debt Snowball” relies on extrinsic motivation while the Debt Avalanche works the best with intrinsic motivation. If you’ve been following the Take Control of Your Finances series on Consumerism Commentary, and you’re committed to the idea of being in control, you have the intrinsic motivation to use the best option.

The Debt Avalanche specifies that your debts should be listed from top to bottom, sorted by interest rate, with the debt with the highest interest rate on top. The balance is not important. To all your debts on the list, pay the minimum monthly payment, but to the debt on top, pay more than the minimum payment — as much as you have available. If your monthly excess income does not meet the minimum payment requirements across all cards, you will have to call your credit card companies to renegotiate. If you aren’t able to make at least the minimum payments, you may be accruing more debt without spending anything. It’s like a cruel magic trick.

This method works best when “all debts are created equal,” for example, when all debts are credit cards. But it doesn’t always work that way. You may have a loan from a family member. Maintaining good relationships with your family should be a larger goal in life, outside of money. You may want to pay this debt off first, even if the rate is 3% while your credit cards are at 14.9%. This decision is a personal choice. If you decide to pay the loan off faster than your credit cards, move this loan to the top of the list. Pay your minimums to all other debts, but to the loan at the top of the list, pay as much as possible.

Once the debt at the top of the list is eliminated, do a little dance if you are so inclined, cross out the debt, and start putting your excess money towards the debt that is listed second. Remember, try not to accumulate new debt during this process.

4. Automate your payments. If you can have your credit cards deduct your payments directly from your checking account automatically, this is a great way to eliminate the possibility of human error from the process. Some credit card companies won’t allow you to do this. It would guarantee that your payments would always be on time, and the credit card companies would lose out on possible late fees and finance charges. Even if that is the case, visit your credit cards’ websites and link your checking account. This way you can pay your minimum or more with one click rather than writing a check, finding a stamp, and remembering to drop your payment in the mailbox.

5. Get in the groove. People get into debt for different reasons. Some people like shopping to buy new things. Some people have an addiction. Others are faced with an emergency with no other options that credit card. Occasionally, people make bad choices. Whatever the reason, see what you can do about changing your behavior. Creditors make it easy to stay in debt, and it’s difficult to see the consequences of debt accumulation. If you’re tracking your money, you have a good indication of the effect debt has on your net worth, and you’re able to predict the state of your finances in the future.

The more you’d like to do with your life down the road, the more money you’ll need. Debt, in all forms, works against you. Get in the habit of making good decisions about your money and spending less than you earn.

6. Complete your payoff. Getting out of debt fully calls for a celebration. It may take decades to do so, especially if you have a mortgage. Celebrate however you may like, but don’t fall back into debt.

Photo credit: quaziephoto

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Take Control of Your Finances Part 5: Build a Better Budget

by Flexo on November 20, 2008

in Money Management

This is the next installment in a series at Consumerism Commentary about taking control of your finances. Please consider subscribing to the Consumerism Commentary RSS feed for updates.

It’s no secret that budgeting is a chore. Although this piece of personal finance carries an ugly reputation, even a simple form of budgeting will help you achieve more towards your goal of taking control of your finances. Despite the negativity surrounding budgets in the news — the economic slide is affecting corporate and government budgets and people are depressed everywhere — personal budgeting doesn’t have to be an ugly process.

Why develop a budget? The purpose of budgeting is not to force someone into spending less than a certain amount of money towards a particular category. A budget should be more like a guide. Yes, you can set aside money for a certain type of expense, but if you find you need more, you can “borrow” from another category or future time in which you expect to spend less. This borrowing, like debt, can get out of hand, so it should be limited as much as possible. Keep in mind that budgeting is flexible.

The best way to visualize a budget, particularly if you pay all your expenses with cash, is to use a system of envelopes. To simplify the visualization even further, let’s assume you receive your income on Day 1 of each month, and you must use that income throughout the month until your next paycheck on Day 1 of the following month. When you receive your income, you take the cash left after paying income taxes and place it into envelopes. On the outside of each envelope, write the name of a spending category.

You should have envelopes for rent or mortgage, insurance, food, and utilities. Also consider budgeting for transportation, household, debt repayments, entertainment, and charity. To get a good idea of where you spend your money, take a look at your expenses, which you track every month. Your most frequent spending categories should determine the labels for the envelopes. Use the data to determine the amount of income you require in each category each month. This is the amount of cash you should place in the envelope.

Do not neglect infrequent expenses. You may have certain obligations that are not paid monthly, like property taxes. If you pay $1,200 every six months for property taxes, consider your monthly budget to be one-sixth, or $200. Then left that money accumulate in the envelope for half a year until it is time to pay the bill.

Do you have an envelope for savings? You should. Consider setting this envelope apart from the others, perhaps in front so you will be reminded that it is one of the most important destinations for your cash. Everything not distributed to an expense envelope can be placed into the savings envelope. From here you can take as much as possible to the bank for deposit, invest some of it, and spend a small portion.

Now that you’ve set a budget based on your past or current spending, see if you can find a few places to cut back. Can you reduce your budget by 10%? You may find that this is not as hard as it seems, particularly if you have excess cash to spend on wants rather than needs. Start cutting back with your wants, but also look at your needs to see if they can be reduced. Once you’re familiar with using your budget, you can focus on the future rather than your past spending habits.

When you pay expenses by check, credit card, or debit card, you may find that it’s difficult to effectively use physical envelopes to manage your budget. Although placing cash into envelopes won’t work for everyone, the metaphor can be extended to software. Here are some of the popular choices:

  • Mvelopes is a website that lets you manage your personal finances online. The site focuses on your budget using a virtual envelope system similar to what I’ve described. Fee: $7.90 or more per month.
  • You Need a Budget is a tool you can download to help you organize your budget. Fee: $12 to $50 to download.
  • Intuit Quicken has a budgeting system included but many people find the feature difficult to use. Fee: $45 or more to download with this link (regularly $60 or more).
  • PearBudget is another web-based option that follows the envelope system. Fee: $3 per month.

If nothing else, use the $0.10 option: a pencil and paper. Writing down your budget will help you stick to it, whether you use paper or computer software. I started my first budget with a pencil and paper even though I was inclined towards computers. I was in a transition phase in my life, trying to get myself into financial shape for the first time. After working for a few years out of college, I left my low-paying, high-expense non-profit job and moved back in with family for about four months. I worked out a plan and a budget, found a new job, and by the time I moved out I was in control. Money was still tight, so I stuck close to my budget for a while.

As you see more financial success as a result of spending less and earning more, you may be tempted to move away from your budget. Despite other advice suggesting to always stick to a budget, it’s a good idea to focus less on the categorization and limitation of your expenses as the need decreases By the time you are sufficiently saving and investing money every month, the energy you spend working with a budget could probably be better spent on other activities. But it doesn’t hurt to check in with a budget once in a while. It has been suggested that more confident personal money managers will succeed better with an annual budget. Always keep tabs on your spending, and evaluate the trends, but don’t tie yourself down.

Budgeting, even in the early stages, should not be seen as a burden. Here are some tips to make budgeting easier.

Consider the 60% rule. I’m not a fan of rules, but sometimes a guideline can help get you started on the right path. As an individual, you can decide what’s right for you, but sometimes an example helps. The 60% rule suggests that the first 60% of your gross income (before income taxes are taken out) should be designated for your non-discretionary, essential expenses, like housing, food, clothing, and taxes. The rest of the income should be split with 10% going towards savings, 10% towards retirement, and the rest for “fun,” or your discretionary expenses.

Reward yourself for staying under budget. If your budget is realistic — not too difficult nor too easy to achieve — then you should reward yourself when you spend less than you plan. With your “fun” expenses, your spending may be variable month to month and difficult to predict. If you make a conscientious effort to spend less than you expected, perhaps by seeing fewer movies in the theater or cutting back on vacation plans, you have extra money left in your envelope (virtual or otherwise). First, move that excess money to savings. If you don’t perceive savings to be an intrinsic reward, treat yourself to something you’d like.

Use ING Direct’s subaccount feature. Since you can split money in ING Direct’s high-yield savings account into separate buckets, you can label these subaccounts to match your budgeting categories. this lets you earn a decent interest rate while keeping your money organized.

Pay yourself first. No matter what, make sure some of your excess income is diverted to your savings. If you set up direct deposit into your checking or savings account, this will require less work. Your savings envelope contains 100% of your income (minus income taxes) after you are paid, and from there you can distribute funds to your remaining envelopes.

Please share any budgeting advice or suggestions!

Photo credits: Bill in Ash Vegas, Jeff Keen

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Take Control of Your Finances Part 3: Spend Less Than You Earn

by Flexo on November 17, 2008

in Money Management

This should come as no surprise to Consumerism Commentary readers or anyone who has spent time reading anything relating to basic money management advice. Once you’ve decided to improve your financial condition and spent some time tracking your spending, you may have come to the conclusion that your situation declines each month because you’re allowing more money out the door than what’s coming in.

Spending more than you earn isn’t feasible for the long term. However, if looking at finances from month to month, even those fully in control of finances will have some instances in which monthly cash flow is negative. Variation is possible over short periods if savings if accessible or debt is available. Over longer periods, the variation should smooth out. The only way build your wealth over the long term outside of investments is to keep your spending lower than your income after averaging out monthly variations. Certain life events may require large outlays in the short term, like buying and furnishing your first home or starting your first professional job. While there are ways to save money when navigating these events, it’s not uncommon for spending to exceed income for a short time.

If after analyzing your current finances you see that your savings is decreasing or your debt is increasing due to negative cash flow, here is how to approach the point of reversing that trend. [click to continue…]

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Take Control of Your Finances Part 2: Track Your Money

by Flexo on November 14, 2008

in Money Management

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

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Take Control of Your Finances Part 1-D: Decide to Take Action

by Flexo on November 13, 2008

in Money Management

After viewing yesterday’s income and expense report for an imaginary person, Dan observed astutely:

… The one area that I don’t see is for a persons IRA, 401K, or ESPP. When is that money taken out or where/how is it assigned? It isn’t like you can say that you had a net income so you placed the net income in these funds because those IRA, 401K, or ESPP plans are taken out as if it was money flowing out.

Let’s call the imaginary person “Roger.” Here is a view of Roger’s income and expense report again.

After paying all non-discretionary (required) expenses, only $175 of the income remains. Roger could take this excess money and save it, invest ir, or spend it. Beneath the non-discretionary expenses, Roger also has discretionary expenses. This second category of expenses adds up to $350. Before Roger can think about saving and investing, Roger spends more than the $175 he has left.

Rather than having an extra $175 at the end of each month, Roger has a $175 deficit. In order to cover all his expenses, Roger has to come up with an additional $175. This will come from savings or a form of debt, like a credit card or a loan. Either way, Roger is cash flow negative and his financial health will get worse every month until expenses decrease or income increases.

If this month is typical for Roger, he will reduce his savings or increase his debt by $1,500 each year. And this is a conservative estimate, because he may need a new car someday or he may want move to a new house. Most likely, he will have large expenses not covered by his income. If Roger has savings to cover the monthly shortfall, eventually they will be depleted. He is not able to save or invest for retirement or any other future goals. Roger will be required to work to afford to survive until he can live no longer.

' title=This should be a wake-up call. In this first part of this series, I wrote about financial enlightenment, the moment when you realize where you stand and your future outlook. I described how to take an inventory of your finances to determine your current position and how to use your income and expenses to predict your improvement or deterioration over time.

In many cases, people don’t reach a turning point in their financial lives until they hit “rock bottom.” That is something that people should avoid as much as possible. It’s not uncommon to just ignore a problem until it gets in the way of normal human functioning. You can live with a broken heater until winter, and you can continue to accumulate debt for a long time. Eventually, you’re going to want to be warm when the temperature drops and you’re going to want to keep your house when you start receiving foreclosure notices.

Now that he has reviewed his finances, Roger should have a good understanding of his condition. So far, I’ve written about self-evaluation, but now it is time for people whose situation is similar to Roger’s to take action. Starting with Part 2, I will share some ideas for moving in the right direction.

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