Question

How canyou use accounting to manage your personal finances

Answer 1

AS THE END OF THE YEAR fast approaches, you may be looking at your checking account and wondering where all of your money went. With vacations, parties and get-togethers, and more time out and about, it can be easy for your spending to outpace your income.

If you're realizing that your current budgeting system isn't working for you (or if you've yet to establish one), not to worry, you can take starting right now to get your financial situation back on track, covering everything from income and expenses, to savings and payments.

Start with your income. Wait, why don't I start with expenses? Isn't that what we're trying to keep track of? Yes, but if you start with expenses you don't know how much you have to actually spend. Establishing your income figure acts as a much better starting point.

Next, go to expenses. How much do you spend in a given year? The reason I like to look at a year here is again the simple fact that while fixed expenses remain constant (think mortgage or car payment), our monthly variable spending can vary … by a lot. For example, the average person will spend more on gifts in December than in February.

To arrive at this number write down everything you spend on – groceries, clothes, a new leash for Fido. All of these things add up, and you should know how much they cost. This may even take you a couple of months to get a good handle on. That's OK, just be patient and diligent.

Now, do you have enough income to cover expenses with some left over? If so, great! If not, see where you can cut, because if you don't have any money going into savings, you'll need to figure out a way to repurpose some of it there.

Set up your savings accounts. The next step here is to allocate your savings. For simplicity, you should have four buckets for savings:

• A contingency account. If you happen to lose your job or need to cover unforeseen medical expenses.
• A retirement account. This one is for your future self. It can be a company managed 401(k) or your own IRA – or both, if you can handle it financially.

Determining one's net worth is an important element of managing personal finances. By assessing net worth, it is possible to place a monetary value on one's financial situation. Financial assets include:

• money in a bank account
• stocks
• bonds
• mutual fund accounts
• retirement accounts
• future income expected from Social Security benefits and pension plans
• the value of a business or real estate investment
• a personal residence, if the property will be sold or the money invested in it will be used to pay for living expenses in the future

• Items such as cars and clothing are generally not included since it is impossible to live off them unless sold for their cash value.

  Financial liabilities include:

• car loans
• mortgage on a personal residence if the home was included as an asset
• mortgage on investment real estate
• student loans
• credit cards
• personal loans

• Determine net worth by subtracting total liabilities from total assets. This information will help evaluate overall financial health.

• Set up a budget tracking system. All of this planning is for naught if you don't manage your finances afterwards, and this is where a budget comes in.

  There are several ways you can go about creating a system to track your income and expenses. One is a simple spreadsheet (or better yet, a shareable Google sheet if you and a significant other are now mixing income and expenses). Another way is to use budget tracking tools like Mint or Quicken. There's even plain old paper and pen.

  Handle your payments. Now that you have your system's framework established, you can start making some actual transactions. The first thing you'll want to do after your paycheck is direct deposited (yes, opt for this) is pay yourself.

  How much should you be saving for retirement? I like to recommend to my clients about 15 percent of gross income. If you have a company-sponsored 401(k), money will be taken out of your account before you are paid. After that, pay your contingency and other accounts. Setting up auto payments is the easiest way to make sure this is done every month.

  After paying ourselves, now we have to pay for things like our mortgage, car, phone, and any other purchases we've made. Again, setting up online billing and auto pay can save several hours down the road in fighting with companies and being put on hold because we were a day late for a payment.

  Reassess annually. Aside from keeping your expenses below your income, another great thing about having this system is that it allows you to make financial decisions based on actual history and not just guess about how much certain things cost.