Introduction

I recently helped a couple of my friends get some new perspective on their financial situation. Since they both really appreciated my advice, I thought it would be useful to share that information via the web. Though I am not trained as a financial planner or otherwise, I believe my advice to be useful and relevant as I have led a fairly successful financial life thus far; I run my own business as an independent music teacher; I own my own home; I am able do most of the things I want financially; I am not in debt (positive equity in my home); and I don’t spend a lot of time worrying about money. I do not come from a family with money, nor did I get an inheritance or win the lottery. I was able to do those things basically from scratch.

Though I could go into detail about various aspects of personal finances, I shall limit the content of this article to showing you a system to simply and practically manage your personal finances. Basically, I will just show you how I do it using one basic spread sheet, without a big time commitment or fancy software.

This article assumes you have access to a computer and a spreadsheet like Microsoft Excel or compatible equivalent such as Open Office Calc: http://www.openoffice.org or online at http://spreadsheets.google.com Open Office and Google Spreadsheets are free. I have included a Sample Budget spreadsheet [download] with this article that you can download to your computer. You can open it directly in Excel or Open Office. Or you can import it into Google Spreadsheets; on the Google Spreadsheet page, click: File > Import… and select the Sample Budget spreadsheet on your computer.

Know the Reality of What’s Going On

I believe the best place to start is by simply facing the reality of your financial situation: How much money to do you make? How much debt do you owe? What are the terms of that debt? How much money is in your accounts? When are you bills due? How much money do you REALLY spend on fun and other stuff every month? Etc.

Having personally experienced varying degrees of financial denial at different points in my life, I know that being honest and forthright about the reality of one’s own financial situation can be challenging and unpleasant, but as the wise saying goes: “Start where you are”. In other words, a clear, honest look at the reality of what is going on in your financial world is the foundation of effective and accurate management of your personal finances as you move forward. So take a moment to see if you clearly and accurately understand all the main details of your financial situation: income, expenses, debt, savings and their applicable terms.

Side notes:

Give yourself a little space and gentleness if you don’t get the reality right at first or if you have some future bouts of denial; coming to terms with your finances can be a process.

Estimate Your Monthly Budget

Now it’s time to start filling out the spreadsheet with your estimated relevant monthly expenses. Be as detailed or as general as you want. The level of detail should be in line with your personality and something that you know you can easily maintain. Obvious entries are: rent/mortgage, food, gas, utilities, phone/internet, fun stuff/entertainment. Since I am self employed, I also add the categories: health insurance, estimated taxes, retirement; I also save up to pay myself my normal weekly pay when I take vacations. Additionally, I have a category I call “Bucket”; this is where I pay for unexpected things like car repair, where I compensate for inaccuracies in my estimates, and where I save up for things I want to buy/do.

Remember that your budget is an estimate: Though some things can be predicted pretty accurately for a while like rent, other things fluctuate a lot like gas. Since it is an estimate, check in with your numbers every once in a while to see if you are actually spending what you estimated. If discrepancies exist, revise the estimates as necessary.

Side notes:

As I said above, you may experience some periods of denial or mis-estimation, hoping that some things will cost less than they do. Remember that it is a process: Keep the numbers as accurate as you can and revise them when needed.

Project Out Your Finances for an Upcoming Time Period

Projecting out your finances for an upcoming time period will ensure that you have enough money coming in to meet your expenses and give you clear understanding of what is coming next and how to plan for it. Similarly to how a weather forecast allows you to plan on how to dress, when to travel, what to expect, etc., a forecast of your financial situation will let you know when money needs to be in your account to pay a bill, how much money you expect to have left over, and so on.

Start by picking an upcoming time period that is right for your situation: If you get paid on the 1st and the 15th, those should be your time periods. If you get paid once a month, that should be your time period. If you want your time period to be something else, that is fine too.

In the spreadsheet:

• Earnings: Enter the money you expect to earn in the next upcoming time period as a positive number.
• Account balance: Enter the money you have in your checking account as a positive number.
• Un-cleared expenses: Enter any un-cleared expenses not yet deducted from your bank account as negative numbers.
• Estimated expenses: Copy and paste your estimated expenses in that fall within that time period as negative numbers.
• Sum: Use the “sum” functionality in your spreadsheet to add all of these numbers together.

This is your projection/forecast of your finances for the upcoming time period. When that period is over, simply repeat this process with the next upcoming time period.

Here is an example to what I do:

• Earnings: I deposit money from teaching about every two weeks; this is my upcoming time period; I make adjustments to that time period occasionally because most of my bills are monthly and I want to keep my deposits in sync. I can estimate approximately what that deposit amount will be based on when student payments are due. I enter the estimate of my deposit.
• Account balance: I go online and see the money I already have in my bank account. I enter that amount.
• Un-cleared expenses: I look through the line items in my bank account and enter any item that hasn’t yet cleared into my spreadsheet (Or more simply, I just subtract those items from the “account balance” figure).
• Estimated expenses: I copy and paste the relevant items from my estimated budget.
• Sum: I sum all of those cells together. I try to end up with a cushion I feel comfortable with in my account so I don’t get any overdraft fees. If there is a problem i.e. I end up with a negative sum, I will do something to correct it, like: take out a budget item that doesn’t need to be paid right away, like retirement or vacation savings. Or I will temporarily transfer money in from my savings account to cover that temporary shortfall. If you can’t take out something non-pressing or transfer money in, hopefully you can do something else to cover that short fall instead of incurring overdraft fees.

I do this projection every couple weeks when I am about to make a deposit or I know something big is coming due, like my mortgage. Though I don’t think this is necessary, I cut my old projection entries and paste them lower in the spreadsheet when the time period has past; I do this in case I need to remember one of the items or revisit that financial snapshot in time; every few weeks, I delete these old entries.

Side notes:

In this age of instant account information via the internet, I don’t balance my personal checkbook. I don’t like to do it, and I think it is a waste of my time. Instead, I occasionally look at my accounts online to makes sure every thing is clearing as expected and nothing unexpected is getting charged. I usually do this at the same time I do my projection.

I also think it helps to chunk things together in general and obvious ways: I don’t go through and itemize all of my grocery or entertainment purchases as it feels like unnecessary effort. I just make sure they are generally on track.

Take a Snapshot of the Big Picture: Your Savings and Debts

Taking a snapshot of the big picture of your financial situation will help you maintain an overall sense of where you are financially. It will allow you to plan for the long term and focus on your financial priorities, like paying down debt.

In the spreadsheet: Enter in the amounts of your savings and debts and their related terms (interest rates, due dates, upcoming interest rate hikes, etc.). Update them periodically based on your preference and personality. I usually update them once a month or so.

Savings: I divide my savings into imaginary categories which are represented by separate line items on my spreadsheet. I do this to help me better keep track of my future financial needs. I have a “Savings Bucket” category for things I want to buy/do or unexpected expenses. I have an “If I Lose My Job” category that has enough money in it to cover six months of my non-optional expenses like mortgage, food, health insurance. Since I am self employed, I have an “Estimated Taxes” category that I fund monthly. This ensures that I have enough money to pay the taxes when they are due quarterly.

Debts: Though I don’t have any debts besides my mortgage, I encourage you to enter in your debts along with their respective terms: interest rates, due dates, rate change dates, etc. and update them periodically. You can search for advice as to how to best pay down those debts as I am not the best source for that information. But in line with facing the reality of your financial situation, these are important numbers to have on your page.

Side notes:

I keep my savings in a risk free, fee free, money market account, and I have it linked with my checking account to easily transfer money in and out as needed. This allows my savings to earn more interest than a traditional savings account.

I also have some line items for my retirement funds and personal stocks.

Final Thoughts

Though it may take you some time to find and enter the information needed to start using this simple, practical financial management system, the time you spend maintaining the information should be pretty minimal; I usually spend 10 minutes or less twice a month to keep these figures up to date.

I encourage you to think of the process above more like guidelines and less like rules. And given that, I encourage you to tweak your management of this information. Come up with news ways and try things out as needed to best suits your needs.

I hope the information in this article is helpful to you and you are able to simply and practically manage your finances from this point on. I also hope taking these steps to manage your financial situation contributes to your over all well being with reduced stress, more time, and increased empowerment. Best wishes!

Copyright 2009 John Shapiro