Financial Strategies

My Dad and father-in-law were at both ends of the spectrum when it came to managing their checking accounts. Dad would spend hours, sometimes days, tracking down a two cent error in his checkbook register. It drove him bonkers when his checkbook didn’t balance to the penny with the account statement.

My father-in-law, on the other hand, didn’t even keep a checkbook register. He couldn’t be bothered with balancing his account. His philosophy was, “If I run out of money the bank will let me know.” That is a hands off approach that few of us can get away with, but, it worked for a person that was born and lived in a town of less than 800 people. The bank did, indeed, let my father-in-law know when he was overdrawn. They never, to my knowledge, charged him overdraft fees.

That approach can work in a small town in Northern Idaho. Most of us, however, do not have that kind of a relationship with our bank. In order for our personal finances to run smoothly, it is our responsibility to make the lifestyle choices, and do the work associated with managing our day-to-day finances. How we handle our checking account and credit card transactions is fundamental to keeping things running well.

My Approach Is Somewhere In The Middle

My approach to managing our family checkbook register is somewhere between the two parental extremes cited above. My wife, Lois, and I record all transactions in our register and, like clockwork, I balance our account every month. What I don’t do is spend an unnecessary amount of time trying to find errors when our account doesn’t balance with the statement. If the error is within comfortable limits, I adjust the account balance and then get on with my life. What’s a “comfortable limit?” That depends on the account balance. My error tolerance is directly proportional to how much money we have on hand when the error occurs. Balancing errors don’t happen very often. More often than not our checkbook balances to the penny. The accuracy can be attributed in some measure to the fact that I use personal finance management software.

The point is that personal finances do require some work, but, perfection may not be desirable. There are a lot of people involved in the processing of the various transactions each of us generates as part of our monetary lives. Those millions upon millions of transactions, large and small, are all subject to our own human error as well as the human errors that can be committed by all of those people behind the scenes who we rarely think about. It behooves us, therefore, to keep tabs on the pulse of our personal finances as recorded in our checkbook and credit card accounts. This ongoing monitoring can be psychotic or a normal, healthy part of our lives. It’s up to each one of us to decide where we stand on this issue. Will we adopt a fringe behavior like one of my parents? Or will we keep it sane and simple (K.I.S.S.)?

Using Tools Imposes Lifestyle Choices

Using a cash flow management tool forces you to make choices by imposing lifestyle traits that are required if the tool is going to work as intended. That may sound intimidating, but, for a well written, user friendly program, the required lifestyle traits are not an undue burden. For those of us who are sincerely interested in having “more money than month” instead of “more month than money,” developing a few, possibly new habits need not be a harsh adjustment. The payback in financial peace of mind is very well worth it.

Choices We Make Regardless

First, let’s take a look at those habits that will make your financial life easier regardless of whether or not you use personal finance software.

* Keep your checkbook register accurate. Your checking account is probably your primary money management tool. It just makes common sense, in my opinion, to keep your checkbook register up-to-date and accurate. If you are not used to writing every transaction (e.g. checks, ATM transactions, deposits) in your checkbook register, or balancing your checkbook every month, these are habits you may want to look at developing immediately. Should you decide to use a money management program, an accurate checkbook is imperative.

* Keep an accurate record of charge transactions. If you use charge cards, keeping an accurate record of your charges and returns is also vital to the success of your cash flow management efforts. In my opinion, not keeping track of charges is a main contributor to why many people get into trouble with charge card debt. I think it is vitally important that, starting today, you keep the receipts from all of your charge transactions for no other reason than for reconciling your monthly credit card statement. If you are using appropriate personal finance software, charge transactions are entered into the program as soon as convenient. The program will, with accurate charging information, keep you informed of where you stand on your charge card debt.

Choices Imposed By Software

The following issues are specific to the successful use of many personal finance programs.

* One checking account. How people manage their personal funds is very, well, personal. For a single person, the choices are simplified. Once a person takes on a partner, however, personal finances can become complicated depending on how much financial autonomy each partner requires. Regardless of how many savings and checking accounts each single or partnered person may have, at least one checking account is normally required for use with the software. This one checking account, coupled with the program, is used to plan for and pay bills; plan and pay for planned purchases; and to smooth out weekly living expenses. The intent is for the program and it’s associated checking account to encapsulate a person’s entire month-to-month financial records.

* Pay bills on a schedule. Instead of paying bills when you receive them or when you get paid, pay your bills on the same days each month. An appropriate schedule for most people would be on the 1st and 15th of each month. The mechanics of bill payment (e.g. check, cash, online, automatic withdrawal) are entirely up to you, but, sitting down twice a month and arranging for your bills to be paid on or before the date they are due will simplify and smooth the paying of your bills.

* Pay yourself on a schedule. “Paying” yourself a fixed amount of spending money the same day each week regardless of when you receive your income will smooth out your day-to-day expenses. How much weekly spending money you give yourself is entirely up to you as is the weekday on which you “pay” yourself. The trick is to find that amount of weekly spending money that is enough for day-to-day expenses, but not so much that you don’t leave yourself enough to pay bills. An appropriately written personal finance program will automatically include your personal “payday” in your month-to-month financial projection so you can easily see whether you have correctly set your weekly spending money amount.

* Keep accurate records. An appropriately written personal finance program gives you a “forward looking” projection of your month-to-month cash flow. When using such a tool, keeping your cash flow projection current is the key to giving you a continual picture of where you are and where you’re headed. You will, therefore, have to be consistent with keeping your month-to-month financial records current. With the right personal finance software, this does not have to be a big chore like keeping track of every penny you spend, or entering and categorizing every check you write. In an appropriately written personal finance program, most of your record keeping will consist of entering bills when you receive them, entering charges as you incur them, paying yourself once a week, reconciling bank and charge account statements, and paying bills. Typically, all of this financial activity will take two to four hours per month.

Paperwork Flow

There are a couple of habits that Lois and I have dev
eloped that simplify tasks like the keeping of accurate records. When any piece of paper is received on which is recorded a financial transaction, that piece of paper is placed in our “In” basket. While most of our financial transactions are handled electronically, there are still items like charge slips, magazine subscriptions and account statements that are printed. By placing all such printed items in one place, they get recorded in our computer records accurately and in a timely manner. It is unusual for one of our paper transactions to be forgotten.

Those pieces of paper that are needed for account reconciliation, like credit card receipts, are put into a “Hold” folder after having been recorded in our personal finance software. Those pieces of paper that are not needed after being recorded are shredded or burned. After reconciling credit card statements, all of the pieces of paper for transactions that have cleared are removed from the “Hold” folder and also destroyed.

It’s a simple system, but, it works for us. As long as everyone in a household knows the “paperwork flow,” and habitually uses that flow, the chances that transactions will be lost, resulting in potential financial errors, are greatly reduced.

Being Big Brother To Your Checking Account

Another habit that I have adopted is the close, online supervision of our checking account. I’m a big fan of online banking which gives me almost up to the minute information about the status of our checking account. As part of my computer startup procedure, I take a look at the activity in our checking account. This may sound a bit paranoid, but, I’ve been able to spot unexpected activity on several occasions. There has been nothing traumatic like identity theft, but, by keeping a close eye on checking account activity I’ve caught unexpected withdrawals shortly after they happened instead of being surprised on the next account statement. The most recent example involved automatic credit card payments that I thought I had cancelled. It took two months working with the credit card company’s customer service staff to straighten that one out. Had I not spotted the first unexpected payment when it happened, our checking account could have been short by $75.00 each of those two months. That may not be a large amount, but, it could have been enough to cause a potential, inconvenient problem if left undetected.

Financial Peace Of Mind

All of the discussed lifestyle habits are so firmly embedded in Lois and my everyday lives that we no longer even think about them. Consequently, our month-to-month finances are smooth with few interruptions. When we do have to discuss financial issues, it’s a discussion over known choices instead of fights over who is doing, or not doing what. Money is not a source of discord in our lives like it can be for couples. Lois and I have been enjoying financial peace of mind for most of the 40+ years of our marriage. This financial bliss can be attributed directly to the unique cash flow techniques upon which our personal finance management software is based.

There are three traditional methods of managing personal income.

1. Budgeting,

2. Keeping a spending history, and

3. Doing nothing (also known as living from paycheck to paycheck).

Budgeting involves setting what percent of future income is to be spent on which categories of expenses, and then recording all purchases in order to track how well spending is staying within the predefined limits. The process sounds very simple, however, it is difficult, in my opinion, to stick with a budget for very long. The energy and dedication needed to keep track of where the money goes is tremendous. I’ve tried budgeting on several occasions and failed miserably because I couldn’t stomach keeping track of every penny I spent.

Traditional budgets also tend to fail because the setting of rigid spending limits does not lend itself well to being flexible. When unforeseen expenses pop up, a budget can be rendered useless very quickly. It’s my experience that budgets can feel like monetary straight jackets that are soon abandoned.

Spending Histories – A Vicious Cycle

Keeping a spending history also involves the recording of every penny spent. The intent is to use the spending history as a basis for identifying spending habits that can be improved and then making needed changes to future spending patterns. The main weakness of keeping a spending history is that it is focused on past activity and, therefore, is of little help when a person is trying to make immediate decisions about spending for current and future requirements.

Here’s the normal cycle of keeping a spending history. This cycle highlights the spending history’s weakness as a personal cash flow management tool.

1. It takes time to accumulate a spending history. While accumulating the history, inappropriate spending habits will probably continue. If you don’t consistently continue your bad habits, you won’t be able to document them in your spending history.

2. You have to keep track of, and record every penny of your spending. Spending information must be recorded in some type of tracking device that is capable of organizing the information and displaying useful reports and graphs. Two popular examples of these tracking devices are Quicken and Money. As mentioned earlier, keeping track of every penny spent, and dutifully recording that information, takes dedication and a lot of energy.

3. Whether or not changes to spending habits are effective, and whether or not habits are really starting to change, cannot be determined until additional spending history has been accumulated. After you have accumulated sufficient spending history such that you can see some of your bad habits, it’s time to adjust your spending patterns. To determine whether these adjustments are appropriate and have the desired effect, you have to return to step 1.

The failure of keeping a spending history as a personal cash flow management tool is, in my opinion, to be expected. This money management technique is, I believe, based on GAAP (generally accepted accounting practices) which are used by businesses specifically to keep track of what happened; not plan for what is about to happen. The “about to happen” part is left to annual budgeting processes. This accounting approach is appropriate for businesses; but, is cumbersome and unresponsive for personal use.

The software used to accumulate a spending history, in my opinion, also contributes to the failure of the spending history technique. These types of programs tend to be too complicated and inflexible for many people. I’ve tried both Quicken and Money. In addition to my own dislike for these programs, I have met very few people who actually use Quicken and Money for their intended purposes. The usual reason I hear for buying either of these programs is because they contain a check register. That is the only feature being used.

The “Doing Nothing” Method

I believe most people end up doing nothing either because they’ve never been shown a better way, or because, like me, they’ve tried and failed at budgeting and/or keeping a spending history. Doing nothing means their personal finance management is reduced to paying bills when the bills come due with the money that is on hand at the time. They live from paycheck to paycheck with periods when they have lots of money interspersed with periods when there may not be enough on hand to buy bread and milk. This roller coaster approach to personal cash flow, in my opinion, encourages ill advised spending and almost guarantees growing indebtedness.

What Is Month-To-Month Personal Finance?

There is a new alternative which overcomes all of the above personal cash flow management problems. Created out of practical necessity, this new alternative may require new ways of looking at, and thinking about personal finances and the tools that are used to manage those finances. Before looking at this new approach to managing personal cash flow, let’s first take a new look at the activities that comprise personal finances. Before you can begin to effectively manage your finances, it helps to have an understanding of what you are managing.

I break down month-to-month personal finances into the following five activities.

1. Receiving income.

2. Paying bills.

3. Paying day-to-day expenses.

4. Paying for larger than normal expenses.

5. Setting aside a cushion.

This list does not include any activity intentionally associated with wealth building. The concern here is dealing with the fundamental issues of living comfortably day-to-day and paying the bills on time. Once those issues are dealt with successfully and consistently, building wealth becomes a possibility.

It is my contention that the main reason people get into trouble with their finances is because they let activity 1, getting a paycheck, control when all of the remaining activities happen. Bills are paid typically on payday because that’s when money is available. Depending on how much is needed to pay bills each payday, the amount left over for day-to-day expenses could be a lot or a little. Sound familiar? And, since the receipt of paychecks is determining when bills are paid, and the size of the bills are determining how much pocket money is left, there is rarely any excess money for activities 4 and 5. Setting aside money “for a rainy day” just doesn’t happen. Making major purchases, such as replacing the refrigerator when it goes on the fritz or buying a new set of tires, adds even more to the credit card balances.

Having growing, uncontrolled debt and no savings can, I believe, be attributed directly to letting your paychecks control your cash flow.

Getting Off The Roller Coaster

How do you break the living from payday to payday roller coaster cycle? Budgeting and keeping a spending history, while very useful to some people, are, in my opinion, not the solutions that work for most of us. Getting control of your finances is, instead, a matter of simplifying your finances. This is done by decoupling all of your personal finance activities. The five activities listed above are related, but they can be managed separately. Once you begin handling your personal cash flow management activities separately, something magical happens. The domino effect of (1) get a paycheck, (2) pay bills, (3) put what’s left in your pocket, is stopped. Instead, your bills begin to get paid on time, and money for day-to-day expenses is consistent from week to week.

The decoupling of personal finance activities is achieved by consistently applying these two techniques.

1. Separate the receipt of income from the paying of bills. Instead of paying bills on payday, sit down and arrange for the payment of bills on a consistent schedule that is independent of when income is received.

2. Fix the amount of money for day-to-day expenses at an appropriate weekly amount. Instead of pocketing what’s left over after paying
the bills, “pay” yourself the same amount on the same day every week regardless of when you get paid.

When consistently applied, these two very simple rules for managing personal cash flow are powerful. I’ve been using them for several decades in my personal finances. Prior to stumbling on these techniques, I used to lie awake nights worrying about how I was going to pay the rent. It was habit for me to be continually on the lookout for yet another bill consolidation loan. Sometimes buying groceries was not possible on short paydays. Setting aside savings wasn’t even something I thought about.

Since starting to use personal cash flow management tools that are based on the above two simple rules, money is no longer a controlling force in my or my wife’s lives. We always pay our bills on time. Lois and I continually have money in our pockets for day-to-day expenses. We have no credit card debt since we pay our statement balances in full every month on or before the due date. And planning for major and unexpected expenses is simple because we have a detailed, forward focused view of our current and future cash flow. Money and bills are not the sources of stress and discord they used to be.

It’s Easy If You’re Willing

Applying the above decoupling rules to your personal finance does not require any special tools. A properly constructed manual or software spreadsheet will do the trick. I used such a spreadsheet in Excel to help a teacher friend of ours go from “more month than money” to “more money than month” in just a few weeks. The problem was that our friend had to come see me regularly so I could update her spreadsheet. She was not that knowledgeable about using Excel. Plus, I was having to coach her on the techniques that made the spreadsheet work. That was when I made the decision to write a program so that I, and anyone else who is interested, would have a readily available, easy to use tool for simplifying management of their personal cash flow.

You also can achieve financial peace of mind. It’s easy if you are willing to make a few simple lifestyle changes including using a personal cash flow management tool that is based on the two decoupling techniques discussed above.

Do you ever wonder where your money goes every month? Does it sometimes seem as though you cannot afford to do things because your financial obligations are holding you back? If you find that you are asking yourself these sorts of questions, perhaps you should take a look at your financial situation and assess whether you are practicing good personal finance management or not. Good personal finance management spends within their income, plan for the future and solve financial problems as they arise. Poor personal finance management pay more, do without and fall behind. If you find yourself in the second category, you can do something about it. You can learn to take charge of your finances by planning your personal finances.

Planning your personal finances doesn’t always come naturally, and even if you’re just beginning to take your financial matters seriously, then you likely need a few personal finance tips.

Evaluate your current financial situation. One of the most important goals for most people is financial independence. Collect accurate information about your personal financial situation. Calculate your net worth which includes the real estate, saving and retirement accounts, and all other assets. This will help you decide how much money you can set aside for meeting future needs and goals.

A basic personal finance tip is to make a budget. A personal finance budget is information made up of your income and expenses and the more accurate this information is, the more likely you are be able to meet your goals and realize your dreams. A personal finance budget should be made for at most one year at a time and include a list of your monthly expenses.

All expenses must be included. To be sure of that go through all your paid bills, check register and credit card receipts to find expenditures that recure every month and expenditures that happen less frequently. Personal finance budgeting requires some small sacrifices. To be able to make good personal financial decisions and set priorities, you must know where your money is actually going. Start your budget and accomplish your goals.

Get an electronic bill pay. This is a very convenient way to pay your bills. You pay them electronically, by direct withdrawal from your bank account. The transaction is processed immediately. You can even link your bill pay service to your personal finance budget, so that your expenditures are automatically entered in the appropriate category. Personal financial management can be really easy.

Make an investment and finance plan. Now that the fundamental state of your personal financial security has been established, the time has come for the more prosperous part of your personal financial life. You need to make a personal finance plan of what you really want in life that money can buy. Your personal financial plan can be as simple or as detailed as you want it to be. Find out how to finally start to implement this plan and get the money to finance it. This is the long term part of your financial. This journey is the most interesting and exciting part of personal financing you can have toward financial freedom.

You can prepare for a secure personal financial future by following these simple tips. When you take control with your money, you don’t have to worry about debt taking control of you.