When working with businesses, the first thing I look at is how money moves in the company. We, the owner and I, review the Chart of Accounts – the backbone of the company’s financial structure. Then we follow a very simple process. First we look at all the accounts that the company is currently tracking. Second we look at what goes into each of these accounts. And third the owner gets homework – to define each of the accounts tracked.
Now why am I telling you about how I work with businesses? Because you need to track your own accounts in a similar way. But you don’t have a Chart of Accounts for your personal finances. In fact you may never have understood or even heard that term before. But you need a personal Chart of Accounts to monitor how money moves into and out of your house. And it’s really not that hard to put one together. A Chart of Accounts is simply a listing of how you use money. It is broken into two basic categories – Income and Expenses.
First jot down how you get your money – salary, commissions, Social Security, dividends, pension, etc. – anything that we can call ‘income.’ There are different kinds of income, but because we are making this simple, our definition of income is money that comes to us.
Then we need to track how money leaves us – oh, let me count the ways! Expenses are things you pay – utilities, rent or mortgage, auto, phone, cable, groceries, etc. Your job is to jot down as many of these as you can. One of the first things you will immediately see is that there are more ways for money to leave you than there are for money to come to you.
Once you have a workable personal Chart of Accounts, define each account. For example,
|Account Type||Account Name||Account Definition|
|Income||Salary||Money from Job|
|Income||Commission||Money from Sales|
|Expense||Auto||Fuel, Repair and Maintenance|
You get the picture.
The next big step is to decide how you spend your money. Put your expenses into two simple categories – Needs and Wants. You may find that this phase may not be as simple as I have implied because sometimes we can confuse our Wants with our Needs.
You Need to buy groceries to feed your family, but where do you shop, what kinds of items do you buy, is eating out easier than cooking, etc.? I Need to eat; I Want a steak. I Need a new pair of shoes; I Want the cute ones that cost more than I can comfortably spend. I Need to get to work; I Want a new car.
There is nothing wrong with Wanting things; we all do it. But when you have a well-defined personal Chart of Accounts, it helps you to focus on your Needs. Once you have a clear idea of how your money moves into and out of your household, you will be better able to manage your finances in an organized manner.