Finance Tracking

Now that we’ve made some changes to our spending plans, and focused our finances a bit, we need to create a system that automatically lets us know how well we are doing with our goals.

As simple as this spreadsheet is, I’ve become a fan of Mint because it enters the information for me. Even though data entry doesn’t take me very long, it’s much easier to have a computer do it automatically.

It’s easy!

Fortunately, using Mint is quite simple. Part of being a Money Master is letting the finances run in the background so that we don’t have to focus on them. The goal is for our money to help us live the life we want to, instead of being a slave to the money.

Mint has created a series of simple instructions that outline how to complete each step. Since we have created our spending plans, now we can just follow mint’s advice to help us make sure we’re on track with our spending.

Set up

Yes, it will take some time at first to get everything put in place. However, this will be time well spent. Once you get everything set up you will be able to simply log in, check the details, and then use the tools that Mint provides to see how you are doing.

Overview

Being able to see a snapshot (no matter if you prefer bar graphs or pie charts) of your personal finances is an amazing feeling. You will be able to see the progress you are making towards paying off your debt, how your savings are growing, and how much of your fun money is left to spend. After all, that’s what it’s really all about, right?

Financial Short List

Nowt that I have a Spending Plan, it’s time to trim the fat from my expenses. Similar to the Short List that helps me free up my time, this will allow me to spend more money on the things that I really enjoy.

Focus

By determining what you really want to spend money on, and what doesn’t matter to you, it is possible to save money while getting to spend more on what you love. This is not more frugality advice: “Stop getting a daily coffee and save $4 a day (approx. $100 a month).” Instead, this process will help focus on the actions that have the greatest impact: “If you don’t care where you live and only use your apartment for storage and sleeping, move to a smaller place and save $300 a month. Then you can spend $200 more a month in your guilt-free category while still investing $100 more.”

The key is to cut ruthlessly from any category that you don’t care about so you can spend extravagantly on things that truly interest you.

Finding your focus

There are two main approaches to figuring out where to cut and where you should spend.

  • List areas that you love and don’t mind spending on.
  • List areas you don’t care about and prefer not to spend money on.

I find that a combination of these two work best. While it is easy to list things that you enjoy doing and things that you will never spend money on, the middle ground is often where you can have the greatest impact.

Paying attention to your reactions will help you identify areas where you can cut back. It’s easy to fall into keeping up with the Joneses and spending money on things you otherwise wouldn’t. Here are some areas you may wish to examine:

  • Housing
  • Transportation
  • Clothes
  • Dining Out
  • Partying
  • Entertainment
  • Traveling
  • Hobbies

My favorite way to look at these is with the help of a friend. I pretend that they are telling me about a new purchase they are making in each of the categories and note my reaction. If it is negative, then I can generally cut my spending in that category. Positive? I have found one of my focus areas.

Some Examples

  • My eyes glaze over when fashion and the latest shopping spree are discussed. I buy timeless clothing that will last so that I can spend a minimum on my wardrobe.
  • I will talk to anyone about any motorcycle, enthusiastically. However, while I love Ms. Peeps, I love the experience of motorcycling, no matter what brand. Thus, I need any motorcycle that is reliable and within my budget. Newest, fanciest, and fastes doesn’t interest me.
  • Whenever a friend tells me of a trip they are going on, I wish that i could go. Travel is definitely a focus for me.
  • I always wonder what people do with all the room they have in big houses. My two bedroom apartment sometimes seems extravagant to me. As long as my basic shelter requirements are met, I am happy.
  • Any time a friend discusses a new restaurant I make sure to find out where it is. I love the experience of dining out.

The results

I only buy new clothes when I absolutely need them, intentionally keep my rent as low as possible, and don’t spend on accessories for my vehicles. This allows me to travel and go out to eat more often.

Recently, I have begun paying more attention to my reactions to spending. As I gain a better understanding of my financial reactions I will be able to create my Financial Short List. With this focus I will be able to spend more money on the things that I love and live a fuller life because of that freedom.

What are some items on your Financial Short List?

Tell Your Money Where to Go

The first task I’ve completed on my way to become a Money Master is to tweak my budget. (If you cringe at the idea of a budget, think of it as a Conscious Spending Plan instead.) It didn’t take me very long, since I already had a good understanding of my finances.

Why?

It’s nice to know that all of your bills are taken care of, and that you can go out and spend money guilt-free. A spending plan allows you to do exactly this. When the money in the “guilt-free spending” category is gone, I’m done for the month. However, I can spend that category on whatever I wish. Ahh… the freedom!

The basic idea

The first step in telling your money where it should go is to have an idea of where it currently disappears to. To find out, track your spending habits for a month. You might want to use Mint.com, an app on your smart phone, or a simple legal pad. Once you know where you spend your money, you will be able to build your spending plan.

A Template

The basic template that I used for my budget only has 5 broad categories. I love this simplicity.

  • Fixed costs – 60%
  • Retirement savings – 10%
  • Long-term savings – 10%
  • Short-term savings for irregular expenses – 10%
  • Fun money – 10%

Fixed Costs

These are the things that you have to pay each month: rent, utilities, car payments, debt payments, insurance premiums, groceries, etc. Fortunately, they normally don’t fluctuate very much from month to month. This makes it easier to plan. After adding all of these together, add 15% to the total. Trust me, you’ll be glad that you have this bit of extra when you need it (think of those extra cold days when the heater is running over-time and runs your bill up).

Retirement Savings

If you’re not adding money to your retirement account on a regular basis, you should be. While 10% is a good rule of thumb, this amount is likely to change over your life. When you’re younger, it will probably be less, and increase as you get older. The most important thing is to be investing something each month, even if you can only manage $10.

Long-term Savings

Long-term savings include things like a wedding, new car, or the down payment for a new house. They’re called long-term for a reason, they’re often a number of years in the future. It’s easier to save big chunks of money over a lot of years than having to come up with it quickly, however.

Short-term Savings

These are often the items that blow our budgets, because we fail to plan for them. Save up a little each month for Christmas and birthday presents instead of having to put it all on your credit card when November rolls around. Vacations are so much more enjoyable when you have the cash set aside before you head out, so start saving for your trip now.

Fun Money

Finally, our favorite category! This category includes whatever you do for fun. It includes things like purses, eating out, going to the movies, drinking, buying books, or spending money on gadgets. There are two important things to keep in mind with this category: spend on whatever you want, until you run out of money. Once this category is gone for the month, stop spending! Knowing that you can go out with your friends, or buy that new thing you want without worrying about breaking the budget is an amazing feeling. Guilt-free spending at its best!

Now what?

I’ve put together my spending plan, so I know where my money goes each month. The next step is to figure out what I don’t want to spend money on so that I can live the fullest life possible.

In the next post I’ll show you how I am going to do all of the things that I want to, and you can do the same! Until then, I’d love to hear what your Fun Money will be going for. Leave a comment or shoot me an email.

Becoming a Money Master

On Monday, I mentioned that I want to optimize my personal finances and then increase my income. I want to become a Money Master.

What is a Money Master?

A Money Master is someone who is in control of their finances without requiring a lot of maintenance time each month. They know how much income they have, outgo they spend, and know how much they can spend on anything that they please. Ideally, they are debt free, or at least actively working toward that goal.

Where I stand

I have a good start to being a Money Master, but still have many improvements to make to my personal finance system. My finance tracker has helped me a great deal, though I have recently switched over to mint.com (because they automatically pull my information and I don’t have to enter it manually).

  • It takes less than a hour a month to manage my finances.
  • I know roughly how much income I have each month.
  • On average, I know how much outgo I have.
  • I have only school debt, and a plan to pay it down as soon as I graduate.

Improvements to make

The good start above can be improved further, so that I can become a Money Master.

  • My finances can be further automated, so that my bills will be paid even when I am away on vacation.
  • I can find an account that offers higher interest rates than I currently have.
  • My budget can be tweaked to make it less complicated.
    Last but not least…
  • I can earn more money

Join me!

Over the next few weeks I will be applying what I know about personal finance. Knowledge gleaned from books like I Will Teach You To Be Rich, The Total Money Makeover, and Financial Peace will be put to use. I will have a finance system that will require almost no time each month, but will ensure my bills are paid, savings are growing, investments are also growing, debt is being paid off, and that I have money left over to spend however I want.

Let me know if you’re going to join me!