This is step one in the plan for Financial Competence because all else depends on it. You can not be financially competent if you don't know how much you're earning, how much you're spending, and what you're spending it on.
Some financial advisers suggest you create a budget and try to stay within it -- and I think that's good advice. But the first step in following a budget is knowing what you're spending -- and often, that's enough. We currently don't have a firm budget, but every month, we look at each category of expenses and ask ourselves a few questions:
- Does this category seem out of proportion? Should we try to reduce it next month?
- Are there any expenses in this category that we can eliminate entirely? Any we can reduce? (For instance, we recently turned off our cable TV entirely. Now we just pay our cable company for Internet, and use Netflix for movies and TV.)
In addition, when I enter each bill into my system, I examine it to see if there's a way to reduce it. Are there any services on my phone bill I can remove? Am I paying too much for long distance? Is my insurance coverage appropriate for my situation?
Currently, since we're spending far more than we should (in our opinion) we're trying to reduce our monthly expenditures by 10% each month. At some point we'll be so efficient that that's no longer easy, but currently there's plenty of fat to trim.
We're doing it that way (aiming for 10% monthly reductions rather than cutting everything at once) to soften the blow -- to make the transition to more efficient living easier.
Now, on to the mechanics of it. I use iBank to track my finances because I prefer Mac OS X for my everyday computers, and Quicken for the Mac is not very good. If you're on a Windows computer, Quicken is actually a very good choice for managing your finances.
I try to make all my purchases via credit card. I don't keep most of my receipts, and so I don't track cash purchases. (I record any money I withdraw from an ATM as "Misc. Expenditures.")
iBank is compatible with Quicken direct download, so I can press one button in iBank and immediately download all new transactions from my bank, Wells Fargo, as well as my credit cards. I won't use any credit card that doesn't support this.
This way all my transactions are automatically entered into iBank and categorized, and I can quickly see exactly where my money is going.
I currently pay many bills by mailing in checks, but I'm considering switching to electronic payments for most of them. This would save on postage, but I'm concerned about not recording transactions. Before I started working towards financial competence, I rarely balanced my checkbook or recorded transactions in anything, and I want to be sure any electronic payment method will keep me tracking these expenses. I welcome any comments you have, Dear Reader, about how you handle this kind of tracking.