Keeping Track of Everything

Everyone will need to read this chapter as it lays out what you will need to do in order to assess the effectiveness of your spending plan.

The basic concept here is pretty simple. You have income and you have expenses. You need to keep track of everything so that you know where your money is going. Income should include money received from all sources. If you have deductions (Federal and State withholding, FICA, etc.) taken out of your check, you should show that by listing total income and then showing the deductions under expenses. Expenses should include not only things like food and housing, transportation and clothes, but also money that you are saving for future expenses and money that you are contributing. It doesn’t have to be a “balance to the penny” system but you need to have in place a way to capture credit card expenditures by category, expenses paid with a check or debit card, and cash expenditures. The good news is that there are some really wonderful personal account software packages out there that can make this part of your financial life really easy.

There are a variety of different approaches to how you should be tracking your income and expenses. Some suggest that everything be divided into three or four general categories and that you track things in that way. Others have dozens of categories and subcategories and require quite a bit of work to manage. What you use depends on your own unique circumstances and what you need to manage your income effectively. Most of it comes down to a pretty basic set of questions. What are my actual living expenses? What do I spend in addition to that amount that is really discretionary spending? What expenditures constitute luxuries and should be viewed in that light? What spending is actually wasteful and needs to be curtailed, even eliminated? Having answered all of those questions, you would then go about setting up the categories that you need in order to track your expenses in a way that makes sense to you. Most software packages allow for some degree of modification and so you can set up your income and expense categories according to your needs.

Keeping track of your income and expense and comparing everything to your plan will help you when it comes time to prepare the next spending plan. Over time as you gain experience your spending plan will become more realistic and you will be able to identify more resources that can be used to meet your goals or that can be used to meet current expenditures.

Start by listing all of your sources of income that you will be allocating to expenditures of one kind or another. As mentioned earlier, you should include gross income and list the deductions that you have taken out as expenditures in one or more categories. Once you have it all listed, you will know what you are dealing with in terms of net income (gross income minus deductions from your paycheck) and can move on to planning your expenses.

You should start by listing all of the necessary living expenses first. This will include your housing costs (including utilities and maintenance), transportation, food, clothing, medical care, taxes, insurance premiums, furniture and anything else that you need to live. To this you add the amount that you plan to give away and the amount that you plan to save for the future. Saving for the future should include specific amounts for your retirement, for the education of your children and for other period expenses such as replacement of some of your assets such as automobiles and appliances.

If you have debts that need to be eliminated, you will also need to include the amount dedicated to debt reduction even though you may have spent the money on something that could hardly be termed necessary. Getting out of debt (especially if it is credit card debt) is necessary and needs to be in your spending plan before you begin to think about expenditures that are somewhat more discretionary.

Once all of the necessary expenses have been planned for and you are working to eliminate debt, save for the future, and have a giving plan in place, it is time to take a look at what is left. This is the amount of money available for other types of expenditures. Sometimes this will mean an upgrade on one or more of the things mentioned above. For example, you may decide to spend some of your discretionary income on meals out. You may decide to take a nicer vacation than you would have without the additional income. You might save more or give more. You might decide to buy a different home that meets the needs of your family a little better and, in the process, secure a mortgage that costs you more each month.

More likely you will find that you do not have enough income to cover all of the expenses that you have just listed. If that is the case you will need to carefully go back through your plan and scale back in areas where that is possible. It is important that you do this! While it may be painful to cut back on what you would like to do in a number of areas, the consequences of ignoring the shortfall will be more painful. Be aware of the fact that the shortfall is not caused by entering a spending plan into an accounting program. It is caused by spending more than your net income. Before you proceed, everything needs to be in balance. This is an essential step if you are to be successful in managing your money.

Tax Deductions

This is a good place to make a point about income tax preparation. You need to know which of your expenses have an impact on your income tax liability or the amount of taxes that you will pay to the government and have in place a system to capture them during the year so that when you are preparing your taxes, you do not have to sift through a lot of documents to find those that will reduce your taxes. Have a single place to keep all of the receipts and forms that are needed to easily prepare your taxes and maintain whatever records will assist you in that task from year to year.

Finally, you need to have a plan on how you will maintain your records from year to year and safeguard them. Some don’t need to be kept very long but others should be kept for years and secured in a safe deposit box at your bank.

 

WEB SITES:

These two sites provide you with the basics that you need to have in a household inventory and one offers an inexpensive software package that will guide you through the process.

http://www.iii.org/individuals/homei/hbasics/home_inventory/
http://www.blucollsoft.com/home_inventory.html 

Keeping records with software have made the process about as painless as it could be. Either one of these programs will do the job for you and will assist you with other financial tasks as well.

http://www.quicken.com/
http://www.microsoft.com/money/default.asp