Friday, November 09, 2018

Getting control of your personal finances in 4 easy steps

I wrote an email to a friend recently to help them get started in getting a handle on their personal finances and, since this is a topic I like to geek out on, I thought the info might be helpful as a post: 

1. Get a picture of your spending: 
Record every purchase for a month (or a week if that's too long, but the month will give you a better picture); this can be as simple as sitting down and listing all your monthly expenses (rent, utilities, memberships like Netflix, phone, cable, etc. car insurance, renters insurance, life and health insurance, debt service payments [like a car payment, student loans, etc], etc.), then carrying a notebook (or folded sheet of paper) with your wallet and just jotting down every time you use a card or cash; what I typically do is I pay for everything I can with a credit card, and keep all the receipts in my wallet, then about once a week I record all the receipts in an app called goodbudget.com (for cash purchases I record them in the app as they happen). It's really simple, but is set up more for once you have a budget set up, so initially you'd just be recording everything as an unassigned new expense.

A great tool for this if you take the time to set it up is Mint.com which you can connect to your credit cards and bank accounts so it will track all your spending for you (you'd have to record cash manually); that said, it takes some time to set up, so I wouldn't see it as a first step, more something to pursue if you find you like this process.

2. Look at the data: 
Add up everything you spent and compare it to your income. The difference is how much you have available to save. Think about the results: sometimes recording all our spending confirms we're where we think we're supposed to be; more often it surprises us with what we're actually spending. The simple process of recording is a hugely helpful tool for getting control because by becoming aware of where the money's going we get more control.

3. Determine a budget: 
Things like rent are fixed expenses but need to be accounted for in the budget; things like food you can decide how much you want to spend on it through choices like eating out vs. preparing at home (here's a great crash-course in starting to prepare food at home while spending at the same rate as the SNAP program).

I use a "simple digital envelope system" I've developed to deal with our finances: I use a spreadsheet to list out all the reoccurring monthly expenses, then I decide what I want to spend in each of four categories ("envelopes") on a weekly basis: "Fun" (eating out, going to movies, buying books or gadgets for pleasure), "Groceries" (just the food we eat that we prepare at home), "Misc." (toiletries, clothing, household goods, etc.), "transportation" (gas, train/bus rides, bicycle expenses, oil changes, auto repairs, etc.). You make these categories in the goodbudget app and then record each expense (or go through your receipts at the end of the week), in order to keep up with the weekly spending (since the monthly spending stays generally constant. (Things like utilities you can average your yearly costs to get a more accurate monthly picture than just what you spent last month given heating and cooling drive up these prices.)

I find the simplicity of this system works really well for me. I have friends who like a much more complex budget tracking system and if you want to get real specific about separating into multiple categories you can do that; it's more a matter of personality in my opinion. There's a great app called YNAB.com ("you need a budget") that is free for a trial period then you pay a small fee for it; I've heard good reviews, but I haven't tried it out because I already have a system that works for me. 
Here is a sample spreadsheet I used when I set up our budget years ago (with numbers randomized for privacy but somewhat representative) so you can see how you could format one: I put in my monthly income from various sources at the top, monthly expenses next, then weekly "budget envelopes" (called that because the old way of doing this was putting cash in physical envelopes at the beginning of the week), multiplied by 4.34 (how many weeks there are in the average month) to show me what my monthly expenses are.

4. Continuing ed: 
Start delving into free, online learning about personal finance. It's really a fun field, and it gives you a great sense of personal control, and even of personal wealth and ability. Mr. Money Mustache (Pete Adney) is a guy who writes about personal finance, being frugal, and lots of other life-hacks--he retired at 32 and has been living on the savings he built up working for 10 years after college for the last 12+ years. There's a whole genre of blogs and a growing group of people called the "FIRE" community ("financial independence/retire early") who are into this. Other good blogs or podcasts are choosefi.com, millennial-revolution.com, radicalpersonalfinance.com. I started with the first article at Mr. Money Mustache then read a few in sequence until I got distracted by other articles on random topics that seemed interesting to me.

A great tool for tracking your net worth (how much money and assets you have vs. how much debt you have) is Personal Capital (the link is my referral link). I'm not saying I recommend or don't recommend their financial advising services, I just find their personal asset tracking tools really useful: you link your bank, credit, mortgage, investment and retirement accounts and they will show you where everything stands. They have a great tool that will analyze your fee costs so you can see how much being invested in a particular retirement plan, etc. is costing you. They will start reaching out to set up a free advisory session--I never followed up on this and they eventually stopped reaching out...

Like I said above, I like to geek out about this stuff, so I'm happy to talk anytime if someone would like pointers setting anything up or talking through their situation!

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