Managing money is one of the most important tasks of adulthood, yet many people do not actively manage their money and get into lots of preventable financial difficulty. People often imagine managing money takes more math skills than they have. However, you can do an excellent job of managing your money with few math skills and no bookkeeping training. Let's look at how to make this task simple and easy.
1) The first step of managing money is actually to manage your mail and receipts. Managing the mail requires a little set up: create a tray or bin for new financial documents (bills, receipts, credit card and bank statements, and any other new papers that pertain to money). Put all money-related mail and receipts in the tray until you are ready to work on them (usually once a week, but more often if money is tight). Don’t put anything not related to money in this tray or bin. Sort new mail each day to keep the task from getting out of control or overwhelming.
2) Choose a regular day and time each week for paying attention to money matters. I use Sundays at 5:30 for this purpose, but use any time when you can be consistent. The point is to have a schedule and to stick with it. To make this step work, don’t allow any other activity at the time designated for managing your money. Put on some nice, calming music while you settle in for this very important activity.
3) Dump the tray out on your desk or table and sort the documents into piles: one pile for bills, another for receipts, another for credit card and bank statements, and another for any other documents. Put the receipts in date order. Check off the items on your credit card and bank statements for which you have receipts (use the expenses for which you don’t have receipts to learn ways to improve how you handle these papers).
Note any errors on the bank or credit card statement so that you can call them at your earliest opportunity (the time limit for correcting errors from these companies is usually 30 days or less).
4) Reconcile your checkbook. This task may sound scary, but it is really simple: use the cut-off date on the bank statement (draw a line in your checkbook under the last transaction in it that is listed on the statement) and mark in your checkbook which checks you wrote before that date cleared the bank and circle those that have not cleared yet (you can tell which ones haven’t cleared because they aren’t listed on the statement). Deduct uncleared checks in your checkbook from the balance on the bank statement. (You will need to look back at the circled items in your checkbook the following month.) At this point, the balance in your checkbook and the adjusted bank balance should match. If they don’t, you need to play detective and find out why (you might have to subtract deposits done before the cut-off date that don’t show up on the statement).
Reconciling your checkbook before paying bills prevents paying more than you can afford and getting pricey over-draft charges or the embarrassment and credit damage of a bounced check.
If you have not reconciled your bank balance for a long time, there is usually no point to going far back in time to correct it (they won’t fix old errors). Just accept the bank’s version of your current account status and keep up with it in the future.
File your bank statement after it is reconciled.
5) Review and pay bills. Before paying any bill, make sure it is correct. Vendors make mistakes too, and they are usually not in your favor. Make sure you got credit for any discounts, coupons, rebates, or returns to which you are entitled. Evaluate whether automatic bill-pay would be a good idea for some transactions, such as utilities (prevents late fees but you still need to study the monthly statement to prevent usage from getting out of hand or the company making errors).
As a general rule, nothing goes back in the tray after finishing each week except for unpaid bills until they are paid. (Put incomplete transactions, such as paperwork for purchases for which you have sent for but not yet received a rebate, or bills you are trying to get corrected in a Pending tray.) File any receipts you might need later, such as for an item that might need to be returned or to document a warranty (attach the receipt to the warranty papers).
6) Make a budget. This can be as simple as writing on scrap paper or as complex as a divided spreadsheet (no, it can’t be done in your head). The point is to create a tool that shows how much you can afford to spend, to see opportunities to reduce expenses, and to save for desired events or activities. The simplest budget just adds up all income sources then deducts all essential expenses, then desired expenses. There are opportunities for savings in every line of every budget; by laying out planned expenses on paper or the computer, you can see where they are.
All budgets are guesstimates that can be improved by updating them with how much was actually spent rather than what you expected to spend. This is a valuable educational process that will improve each time you do it.
Use your budget to decide how much you can spend each month in optional categories. If your spending forces going into debt (including any credit cards that are not completely paid off each month), scale back to prevent the constant distress of indebtedness and bankruptcy.
7) File receipts for tax-deductible items where you can easily retrieve them when it is time to do your taxes. Put all tax-related documents (such as forms or IRS income reports) in the same place.
The first time that you follow all these steps to manage your money will take longer than it will after some practice and may be a bit distressing, but each time you stick to the schedule and control your money, it will become easier and you will have a better life, with more control and more self-respect.
© Gloria Valoris, 2013
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