Where does it all go?

This is the fundamental question at the heart of managing your money. Most people - even the most responsible ones - suffer what I call "leakage." That money that gets spent but you don't seem to remember where, or what you actually got for it. It's my belief that before you can do any of the other good things in money management - budgeting, cutting expenses, paying off debt, or establishing an emergency fund - you need to know what you are actually doing with your money. That way you can find where your leakage is going, and then set a realistic budget that you can really stick to.

Traditionally, this kind of tracking has been done by hand. The more accounting-oriented might have actually kept a ledger, while most people just kept tabs by balancing their cheque book. Of course, most business was done in cash, so it also used to be much harder to track each item spent, but, since you couldn't just run into the negative in tight moments, it was also harder to get into trouble. Computers have made life so much easier, and there is now a huge number of programs out there that will help you do this. I have put together a list of programs that I am aware of, something to suit every price range.

Starting Up

Now that you have software to manage your money, where to start. The basics are pretty straighforward:

• Set up your accounts
• decide how to categorize your expenses
• set up scheduled transactions for your predictable expenses
• begin entering every transaction

Setting up your Accounts

Where do you have money, where do you have debt? Setting up your accounts is about creating a full picture of your finances, all in one place. If you've never done something like this before, it might mean heading to the file drawer, and pulling out all your statements for bank accounts, credit cards, student loans, mortgages, and investments. Don't worry if you miss something, you can always add more later if you find something. For our purposes right now, we're mostly concerned about your daily spending accounts - chequing account, credit cards, and possibly a short term savings accounts. The benefits to putting all those other accounts in will come later, when you get to setting long term goals.

The process for adding an account will vary from program to program, but the essential thing is to give it a name that makes sense to you, and to accurately input the current balance.

Decide How to Categorize Your Expenses

Deciding how to categorize your expenses is probably the most challenging part of the setup process. Most programs come with some built in categories (or "expense accounts"), but they're rarely the ones that you want or need. Some programs, such as Quicken, support nested categories which allow you to group things, so you can get both an overview, and more specific details on your spending. Below is a list of sample list of a few common expense categories

• Food
  • Groceries
  • Restaurant
  • alcohol
• cash
• transportation
  • auto
    • fuel
    • maintenance
    • purchase/lease payments
    • insurance
    • parking
    • registration, fees and fines
  • bus
  • bike
• bank charge
• housing
  • mortgage interest/rent
  • repair and maintenance
  • property taxes
  • condo or homeowner's association fees
• utilities
  • natural gas/heating oil
  • electricity
  • water
  • home phone
  • cell phone
  • internet
  • cable/satellite

You get the idea. Expand the list to meet your needs, or take off items that are irrelevant. These categories will be very helpful later in the process, when we take a look at where you are actually spending money, so if there's a specific question you have such as "how much money does it cost me to buy lunch every day?" you need to create a category specifically for that, so you might have two restaurant categories - one for lunches while you're at work, and one for dinners and family meals. If you often miss payments, or have NSF charges, consider creating a category just for that - this might give you some motivation, as it will show you exactly how much money good financial management could save you.

There's a limit at which the detail gets too cumbersome, and so you should have a miscellaneous category to catch odd items. A rule of thumb that I use is that the combined total of Misc and Cash shouldn't be more than 5% of your spending, and less is better. I should mention that I am not a big fan of cash spending. There's a lot of reasons, and I'll explain why in a future article.

Setting up Scheduled Transactions

Most of these programs can automatically enter, or prompt you to enter, common events. These are things like paychecks, utility bills, mortgage payments...the things that you always know when they are coming, and approximately how much they will be. This gives you a chance to plan, so that you can ensure that you've got money set aside for a bill, hopefully avoiding potential penalty charges.

Begin Entering Every Transaction

The whole point of this exercise is to give you a system where, every time you spend money, you come home and tell the computer how much you spent, and what category that spending belongs to. Some of these programs can download information from your online banking, which makes the process a bit simpler, but you still need to categorize the spending, and make sure everything is there. If you write a cheque, your online banking can't know about it until it gets cashed, sometimes months later, to avoid any surprises, make sure you manually enter it, and think of it as money that's already been spent, even though it's still in your account.

The benefits of this are twofold. The first benefit is that you know, every time you open your financial program, exactly how much money you have, and what you owe on your credit cards. So the next time you're tempted by a discretionary item, you can give yourself an honest answer to the question "can I afford it?" The second benefit is that you can take a look at the end of the month, see where you've spent money. Again, this gives you the information to make good decisions about your spending, and decide for yourself if maybe the cost of, for instance, alcohol is more than the value that you get from it.

Next up

The next step in money management is setting up your first budget.

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