Many people will tell you the first step in managing your money is to create a budget. While I do believe budgets to be important, for many people the first step is something much more basic: getting in the habit of tracking your money.
This is not as easy as it sounds. In our highly-competitive society, there are more options for anything than we really need or know what to do with. For example, consider all the different options for simply paying for a purchase:
- Credit card
- Debit card
- Money order
- Gift card
- Electronic Funds Transfer
I’m sure there are more, but you get the idea. Most of us use at least three of those options. I personally use all but two between my personal spending and my business. With so many different ways to buy something, each with a different means and rate of tracking, it can become very easy to at least temporarily forget where your money has gone.
It can be very easy, for example, to charge something on your credit card and then forget you’ve made that purchase until the statement comes up to a month later. It can be nearly impossible to stick to a budget if you spend money in a certain category, forget you spent is, and then spend that money again thinking you still have it available. When the bill comes you will likely find yourself surprised and over budget.
So what is the solution? Well, there are two, actually, that work together: Simplify and Track
Simplify: Do you really need all those different payment methods? Do you really need, for example, to have your savings account at one bank and your checking account at another? Do you need to use three different credit cards? Do you really need to use both checks and a debit card? Look for ways you can reduce the number of “Outgoing Streams” you use. While I did admit to using nearly all of the payment methods listed above, there are only two I use with any regularity.
Look for ways to simplify. Use only one credit card if you can. Put all your accounts together at a single bank. Choose to use either your debit card or your checkbook exclusively. If you find it difficult to choose between some options, always select the one that is easier to track.
Track: Develop a habit of gathering evidence of every purchase you make. Hold on to receipts. Write down all checks you write in your check register. Check your credit cards and/or bank accounts online at least twice a month. Keep a running total of all your accounts and expenditures in a single place and consolidate all your records into that Single Source of Information (SSI) at least twice a month.
I use Quicken as my SSI, but anything will do, so long as it is simple and you’ll use it. I keep the books for my homeowners association in a paper ledger, for example. because it’s simple and portable (for taking it to meetings for the members to audit the books). I consolidate my records three times a month; mid-month, just before month-end, and after month-end when my bank statement comes. Others may need less often than that, and some may need more, but I’d recommend no less than twice a month or you’ll miss making important payments.
Once you Simplify and Track you’re in good shape for devising a budget and getting your finances under control. You can’t control what you can’t see and understand. If you don’t develop the discipline to at least track your money you’ll never be able to develop the discipline to create and stick to a budget. Tracking your money is the foundation to every other step that leads to financial self-reliance and, potentially, independence.