"Personal Checks You Can Bank On!" ™
Most financial experts recommend that you track every penny you spend. By tracking your spending, you see where the cash goes and what you can cut, if anything. The methods for tracking your spending will vary according to your personality. What matters most is that you choose a method that works.
Cynthia Hargrove, a financial consultant, recommends that you consider your own weaknesses, your personality, and your saving goals to identify the method that works best for you.
How It Works
In most cases, you have a spreadsheet or a document that lists out the amount you have for each category. You then enter the money you spend in each category.
Categories in a traditional budget might include the following:
Will It Work For You
This form of tracking works best for individuals who prefer a traditional or hands on approach to budgeting. They are good with details and like to see exactly how everything works out. Unless you have someone to hold you accountable to keeping a traditional budget in ledger or worksheet form, you should not use this method if you are absent minded, prone to procrastination, or struggling with impulse spending.
Benefits
When you keep a traditional budget and update it regularly, you know exactly how much money you have for each category and what you need to reach your goals. This form of tracking is one of the most popular traditional forms precisely because it gives you so much information for a relatively low investment. It also coincides well with balancing the checkbook, a recommended procedure for any tracking method.
Risks
Maintaining a traditional budget requires attention to detail. You must input all of the data or else it will be a worthless piece of paper. It’s also important to stay on top of it. Unless you have someone double checking your work, you are the only one to hold you accountable for how you handle a traditional budget.
How It Works
You figure out how much you need to live each week by taking into consideration the following categories:
You then withdraw that amount from your bank account and divide the money into the appropriate categories. Each category is an envelope. This allows you to see how much money you have. When you make a payment by check, you deposit the money first in the bank and then you write the check. When you purchase groceries or some other item, you pay with cash.
Will It Work For You
This system works best for those who are more visual or tactile and who prefer to see where their money is going. It works well for the free spirit as well and for teaching yourself discipline with money. If you choose to overspend, you have to actually dip into another account. For maximum effect, you should not have credit cards or checks available, except for potentially an emergency one if you can control the impulse to spend.
Benefits
Actually handing over cash for payments is one of the most powerful reminders to keep spending in check. And the consequences of overspending will quickly become apparent with this method. To further the effect of this method, only take out what you intend to spend with an little bit extra to cover emergencies.
Risks
There is no safety net with this method. Once the money is gone, it is gone. It is one of the fastest tools for teaching any person to avoid overspending. The other risk though is that the money may be stolen. The envelopes should be kept locked in a safe or safety deposit account. You should not carry all of the money with you.
Keeping good records is particularly important with this method. Cash transactions can be the hardest to follow as far as taxes are concerned. Make sure that you balance your checkbook regularly and reconcile it to your bank statement. Also make sure that you tuck money away in savings at the beginning of the week so that you are not living one week to the next.
If you choose to use this method, do not advertise it. Even if you want to share how great the system works for you, share it under a pseudonym.
How It Works
You select a financial tracking program or application. In some cases, you input the spending information and target goals. In others, you link it to your accounts, and it catalogues the information for you.
Will It Work For You
This system works best for the busy person or one who struggles with attention to detail. Financial tracking applications which track the information are particularly ideal for those who do not always pay attention. Some even come with automatic reminders and warnings if you start to pass a certain marker.
Benefits
Financial tracking applications make tracking your finances easy. Some programs even create categories based on what you spend, remind you to set financial goals, and give advice to achieve those goals. The accuracy, legibility, and consistency of these programs is, in general, better than most other systems.
Risks
These systems are only as good as the people who put the information in. The biggest risk is that when you start using one, you will put all your faith in the application or program and stop doing your own analysis. Remember that no matter what method you use, you always run the risk of error.
Even with backup, your systems may be corrupted, hacked, or deleted. You may not be able to access relevant information, and you could be shut out of your accounts. Identity theft is particularly dangerous when your identity is linked to all of your financial accounts. You should not rely on this method solely. Keep all passwords and identity verification information separate in an area where you can access it if your online application goes down.
How It Works
You calculate out how much you need to live each week by taking into consideration the following categories:
After you make the calculations, you deposit the money in a week by week segment to a trust or a trusted friend who will give you the money you need for each payment.
Unlike the other system, you do not have all of it with you at one time. You only get what you need from your friend or the trust as you need it. You can only use the money for the categories you list, and you must define what you intend to use the money for, and then demonstrate that you actually used it for that purpose.
When you give the money to the trust or your friend, you should get a receipt. When you take it back from your friend, you will also need a receipt. In certain cases, the trust manager or friend should also keep record of your spending.
Will It Work For You
This system is ideal for those who cannot control their spending impulses or manage their finances at all. It gives the hard reality of using cash to pay while at the same time giving you the benefit of a mentor and accountability partner who will not let you make foolish spending decisions.
Benefits
This system removes the temptation of blowing an entire paycheck on something foolish. It also gives experience in spending money and provides an additional layer of accountability that most other systems do not.
Risks
Make sure that you trust the person you give the money to or the trust manager. Trusts can be somewhat expensive when compared to the other options, and just giving your finances to someone else can be risky if they choose to bolt with your money. Additionally, this system is not forgiving of emergencies.
This method for tracking finances should not be considered a long term or permanent solution. It is better as an intervention and training method intended to help you become a better financial steward and manage your own accounts.