An Engineering Approach to Money

In my previous post I discussed the importance of spending less than you earn. The best way to know how you are doing is to closely monitor all your income and expenses and plot this month by month. That way you’ll know how you are doing each month, and whether things are improving or not.

My wife and I have used Quicken for this since 1994 and all that data is there to go back and review if we need to. We can easily see the difference between our income and our spending each month, and for the entire year. You can see that there are months when we spend more than our income, and other months when we spend much less. Mostly this is due to the fact that we pay for things in the most efficient manner possible which often means paying for things like a years worth of auto insurance in one lump sum, or property taxes all at once rather than paying month by month.

We can also go back and review our spending at any time to see how it compares to past years, where we piss money away and where we spend it very carefully. We can decide if we want to save more or spend more and have a very good idea about how that will affect our ability to reach our short and long term personal and financial goals.

This past summer we took a 7 week car trip with our kids to the East coast. I had to take several weeks without pay to get that big a block of time. Since we knew what our spending was, and could estimate the cost of the trip and make a very informed decision about the value of making this trip vs the amount it was likely to cost us in lost income and how much extra cash we’d have to come up with to make it happen. This kind of detailed information is truely empowering whether you are trying to figure out how much you can save, or if you have enough money to make that big purchase.

Here is how we do it.

1. We have an account for each credit card (2 or 3 of those), each credit card purchase is recorded and categorized when the bill arrives.
2. We have a cash account that gets money each time we take cash out of the bank, each time we make a cash purchase we save the reciept and write that down in the cash account. In essence it’s like a 4th credit card account.
3. Every few weeks we count of the cash in our wallets and if it doesn’t match (it’s usually off by $50 or $100 depending on how careful we are being we put a charge against miscellanous for that amount.

In this way we can track our net worth too since we also have accounts for our big items such as the house and cars. To be able to fire up Quicken and get a quick picture of our current finacial situation is critical for making good decisions. Yes, you can do it with pencil and paper, but for $50 every two or three years Quicken will do much of the tracking and it files things away much more efficiently than I ever could.

Quicken is a key tool and I can’t imagine living in the modern world without it.

This entry was posted on Thursday, August 24th, 2006 at 12:46 pm and is filed under Spending. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.