On Monday I confessed that since I stopped tracking my spending, I've actually had some trouble paying my bills. It's not that I don't have the money — I have plenty! — but that I no longer have a system in place to remind myself to take care of routine financial tasks. Quicken was my system, and when I stopped using it, order vanished.
In the comments on Monday's post, Rob Bennett made an astute observation:
Good money management is not intellectually difficult. Nor does it connote moral superiority. It is all about habits. Some people get in good habits (for any of a hundred different reasons) and some people get in bad habits (for any of a hundred different reasons). And that determines how things turn out. We should be spending more effort figuring out what causes people to get into good habits and forget the rest of it, which is mostly just people talking.
And Shara wrote:
Maybe you could collect some methods people use and write a post about it. So many people starting out stumble around because “do what works for you” doesn't work when you don't have the experience to build a system that works for you. […] “Track every penny” or “automate your bills” aren't systems. They're tools and ideas. Some people need a few more specifics.
I think Rob and Shara are on to something. There's no one “right” way to manage your money. Instead, there are a bunch of different methods and systems that work for different people.
Today, let's talk about the systems you use to manage your finances. Are they effective? What works and what doesn't? What have you tried in the past that didn't work? What would you recommend for folks just getting started?
As an example, here's how I used to manage money, back when I was in debt. This system (or non-system, actually) didn't work at all:
- I had no savings. None. I only had a checking account, and its balance was nearly always between $10 and $30. When I got money, I spent it. If I had none, I didn't buy anything.
- I dumped my bills on a desk with all of the rest of my mail. I had a mental list of when things were due, but I didn't do a good job of following through. I often mailed payments on the day they were due. (Though I was rarely, if ever, late.)
- Because I didn't track my spending, I had to guess at my bank balance. Using the ATM balance as a starting point (this was back before online banking), I'd try to remember what checks I'd written and what purchases I'd made with my debit card. This was very imprecise.
- I was lazy. I got paid twice a month, but often wouldn't deposit my paycheck for days. This wouldn't have been a big deal except that (a) I was living paycheck-to-paycheck, and (b) I'd often already mailed bill payments based on the new paycheck. As a result, I suffered from frequent overdrafts.
- I treated credit cards as a sort of sneaky way to buy things when I didn't have the money. I had several credit cards, which were nearly always maxed out. And when they weren't maxed out, it was only because I hadn't found anything to buy.
Basically, I had no control over my financial life. It never occurred to me that I ought to have control.
Now things are mostly different. Obviously, I still struggle with organization, which is why I managed to have a late payment of $23.23 to the hospital. But as I said, I think that error is due to the fact that I recently abandoned the system I'd been using for the past five years or so. Here's the system that worked for me as I dug out of debt and started building wealth:
- I automate as much of my financial life as possible. This means I set up automatic payments where that's an option, and I request electronic statements instead of paper statements.
- I use my cash-back credit card for as many purchases as possible. For everything else, I try to use my debit card. I only write a few checks a month now, and the only cash I use is my “adult allowance”, for which I don't keep detailed records.
- I use my wallet to collect all of my receipts.
- I gather all of my bills and financial documents into one location (usually next to my computer).
- Once a week (sometimes once every two weeks), I sit down to enter all of my data into Quicken. (I chose Quicken because that was the only option for the Mac when I started keeping track of my expenses; you should choose whichever program best fits your needs.)
- Once I've “done Quicken”, I shred the unimportant documents. I use a document scanner to digitize the important stuff, and then I shred most of that, too.
- Some documents (like tax forms) end up in our fire-proof safe (purchased cheap at Costco).
- I have three sets of accounts: my everyday checking account at the local credit union, a set of savings accounts (each with a different purpose) at ING Direct, and my retirement accounts (both Roth IRA and 401(k) at Fidelity). I regularly transfer surplus cash from my credit union to the appropriate ING Direct account. And a couple of times per year, I make deposits to my retirement accounts, based on what I think I can afford.
While this may not seem like much of a system, it works for me — or did until I tried to mess with it. That's why I'll be going back to the way things were; I feel like I've lapesed into a bad habit.
My financial success has been all about replacing my bad habits with good ones, but I did a lot of stumbling around before finding methods and systems that worked for me. My habits still aren't perfect, and probably never will be, but they're enough to keep me in positive cash flow while also setting aside money for retirement and giving me a bit to spend on today.
What about you? How did you find the methods and systems that help you manage your money effectively? What are those methods and systems? What sorts of people do you think they'd work for? And what options did you reject before picking the processes you use today?