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Manage Your Money With Software

Sometimes I wonder how I kept track of my personal finances before using my financial software. Those were simpler times when most of my purchases were either by check or debit card so my check register and other menial approaches were adequate. Now things are more complex with accounts at several banks and credit cards whose rewards programs we take advantage of.

Bringing all that information together in one place, let alone managing it effectively, is a daunting and potentially time-consuming task. It doesn’t need to be, though, with the software packages that are available. Microsoft Money and Quicken are perhaps the two most popular financial software packages on the market at present. Both have very similar functionality that facilitate the following useful activities:

    • Downloading and reconciling monthly statements
    • Categorizing purchases
    • Creating and reviewing budgets
    • Determining your full financial picture (i.e., net worth)

At first I wasn’t sold on the possible benefits of moving all my financial information into a single piece of software. Excel seemed to be working fairly well, and I had a nice system going — I thought. On the advice of a friend whose opinion I trust, I bought a copy of MS Money and began using it. There were lots of new things to get used to.

Note: Though in this post I’ll describe my experience with MS Money, the approach and thoughts likely apply more generally to the other packages available on the market.

What does it take to get started?

Within MS Money you set up accounts for bank accounts, credit cards, CDs, car loans, mortgages, retirement accounts, cash, etc. You also create categories for your income (wages and tips, interest, etc.) and expenses (groceries, insurance, etc.), and transactions in any account can be assigned to any of those categories. The categories don’t all need to be in place before you begin using the software because you can add them at any time, plus MS Money has a number of built-in categories. Still, you may want to give some up-front thought to what you want to track and in how much detail. More about that a little later.

Setting up the accounts requires familiarity with the software or a willingness to jump in with both feet and learn. It’s a bit of a catch-22 because until you have your accounts set up, you can’t really learn how to effectively use the software. Setting up just one account and using the software doesn’t work because in order to properly categorize and account for all your transactions, money moving from one account to another must be classified as a transfer. Even a payment on a credit card must be setup as a transfer or else it the software will think you spent the money twice: once in your credit card account and once in your checking account.

As you set up your accounts, you’ll need to draw a line in the sand that divides your financial history into two periods: “pre-MS Money” and “with MS Money.” Reconcile all your accounts up to that line so you can enter a starting balance for each. For some of the more complex accounts such as your mortgage, you may want to take the history back further, but that’s your call.

What happens on a monthly basis?

Your experience and preferences may lead you to a different way of interacting with the software, but here are the steps I take:

    1. Download transaction data for all of my accounts. MS Money is capable of directly connecting to some financial institutions (such as some of our retirement accounts and credit cards) while other accounts (credit union and other bank accounts) require logging into the banks’ websites and manually downloading the transactions.
    2. Review my receipts categorizing individual transactions and marking them as “accepted.” – MS Money has a screen for each account that shows all the transactions for that account, and transactions that aren’t accepted yet show up bolded. Fortunately you can specify a date range so you’re not looking at everything since the beginning of time. We collect our receipts/statements/paid bills/etc. in a folder marked “not posted” until I’m able to review each one. I take the receipt out of the folder, confirm that the dollar amounts match, and file the receipts in the way I talk about in Filing Personal Receipts.
    3. Review any transactions not marked as “accepted.” – If there are remaining transactions that haven’t been accepted (there inevitably are), it means that I didn’t have the receipt. Sometimes we lose a receipt or pay a babysitter with a check, so a missing receipt isn’t a sure-fire sign of fraudulent charges. It’s still important to look into each one though, because it could be a mistake or an indication of problems.
    4. Reconcile each individual account using the respective monthly statements. – This is a step that has evolved over the years that I’ve used MS Money.
      • Originally: I would step through each transaction to make sure the paper statement lined up perfectly. This approach was very time consuming and recently I determined that it didn’t add much value despite taking so much time.
      • Presently: In MS Money I sort the transactions chronologically and find the last transaction that’s included on my paper statement. The running balance for that line should show the same total as 1. the amount due on the credit card statement or 2. the period ending balance on a savings or checking account. If the two numbers match, I mark all the transactions as reconciled in MS Money. If not, I spot check the transactions until I figure out where the mistake was made.
    5. Check the built-in “Spending By Category” report. – Any transactions that aren’t categorized are assigned to one called (this should surprise you) “uncategorized.” This report allows you to specify a date range and then drill down to (and edit) the individual transactions within a category. I first review anything in the category “uncategorized” and assign them as appropriate. Then I spot check some categories and look more closely into any where spending seems to be excessive. Sometimes I’ve miscategorized transactions, but more often than not we’ve just made a big one-time purchase.
    6. Check the built-in report showing spending by category per month. – This report is useful for identifying spending trends. Are we spending more on groceries compared to this time last year? Has it been growing steadily or did it jump up suddenly one month?
    7. Review how closely the budget matched actual spending. – Having a budget does you no good if you don’t review it to see how closely you’re following it. When there are differences, I will sometimes adjust the budget up or down depending on external changes (e.g., a gym membership that ended, gas prices rising, etc.). Usually I’ll print out the budget so my wife and I can discuss how we’re doing.

(For additional information on categories and how I use them to track our spending, you’ll want to check here for a link to my other post — I’ll insert a link here once I get it written!)

Those who want to keep close track of their personal or family finances would be well served to utilize software to do so. It can eliminate many of the tedious and repetitive tasks normally associated with “keeping the books.” The software is a single repository that will help you manage your earning and spending more carefully, and at any given moment you can get a feeling for your net worth. You may be different, but I personally enjoy knowing where I stand financially and watching it slowly improve each month.

November 25th, 2006 | Category: Budgets/Saving, Finance, Investing, Etc., Net Worth, Non-Finance, Personal Finance, Technology/Software

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