Clarifying Your Financial System

Posted by André Nosalsky :: March 3, 2008 @ 5:14 am

In an earlier post in this series, I made the point that personal finance can be viewed as a system, with money flowing into our system and money flowing out. Many times, the money leaving our system exceeds the money coming into our system. That’s called living on credit. Usually a financial system cannot sustain a prolonged period of living on credit. So the point of this post is for you to determine and clarify your financial system.

Now that the holidays have passed, spending usually goes back to “normal,” so keeping track of how your financial system works for one month will give you a pretty good picture of everything that’s involved. Get yourself a notebook or some other tool that you will use to keep track of your spending. I use my BlackBerry, which has a “Memo” program where I can quickly type in a transaction and its dollar amount. The BlackBerry is handy for me because it’s usually always with me. Find what works for you.

In tracking our transactions, we want to answer the following questions:<

1. Where is the money coming from? And how much? Here you can list of any sources that you have had money come from in the past and expect to receive money from in the future. For most, our jobs will the number one contributor. You may also include part-time gigs, interest income, bonuses, child support, proceeds from P2P loans on Lending Club, or any other source that puts money into your life. Checks, direct deposits and cash all count. Don’t forget the small cash amounts!

2. Where is the money going? And in what amounts? First, I want you to write down five to ten categories that you can assign to your expenses. Examples of categories include: living expenses, food, transportation, entertainment, fees and miscellaneous. If you know you’re spending a lot of money on one product or activity, make a category for it. For me it was coffee, so I had a “coffee” category.

Once you have your categories, use the same process that you followed with your income, and write down every time any money leaves your life. If you are spending 50 cents on a bus ride, write it down. If you spend $75 on gasoline, write it down. You want every single transaction written down; nothing should be missed, especially those small transactions that add up to big bucks.

Many people, myself included, are at some level emotional about money. It’s not just green paper. Because money is so emotional, most of us misjudge how much we make, how much we spend and where that money is spent. When committing to one month of keeping track of your income and expenses, you will have hard facts about your money. You will be able to separate the emotions from it and then proceed to make decisions based on real facts that you gather, write down and analyze.