Thursday, February 23, 2017

Logging Every Purchase and Bill

Using Quickbooks to log every purchase and bill has been a pain in the butt, but fundamental to getting my finances in order.

When I went off to college and lived on my own, I had no formal training on how to manage my finances.  I think my Mother took all of ten minutes to show me how to write checks and put the amounts in the register, and then made vague noises about balancing her checkbook once a month, "but it never balances out" she said - an indication of how sloppy my parents were with money.

My Dad was no better, letting bills pile up until the end of the month and then sitting down and writing checks, usually getting angrier and angrier at how much his spendthrift family was taking out of his paycheck - or spending more in fact that he was making.

And so, I set out in life with no clue on how to handle money other than to spend it.  And for the next decade or so, I bounced checks, was regularly short on funds, and used my wallet as a means of monitoring my spending.   If I had cash in my wallet, I spend it.  When it was empty, I had to wait until payday.

It was a pretty shitty way to live.

When I graduated from college and law school, I got better jobs and made more money.   But my financial habits remained largely the same - just on a larger scale.   Credit cards became my new friend - always happy to loan me money until payday, with interest of course.  And like most Americans, I "managed" my finances with credit cards, slowly building up debt over time until one day you "suddenly" wake up and discover you have this credit card debt that no matter how hard you try you cannot pay off.

70% of Americans with credit cards carry a balance every month, according to the credit card industry.  If you look at the ads for credit cards and banking services, you realize this is true - so many ads are aimed at people with perpetual credit card debts or other debt problems.   It is so pervasive we all assume it is "normal".

What saved me was starting my own business.   I loathed the idea of learning how to balance the books, and many other lawyers and businessmen do as well.  Often, they hire an accountant or clerk to do this for them, and then act shocked as this poorly-paid individual is found to be skimming off the top for decades.  You cannot run a business without understanding basic accounting.

So I took an adult education class on how to use Quickbooks and learned what "accounts receivable" and "accounts payable" meant.  Some classes in law school on tax law helped me understand what accrual and cash basis meant as well.   I started to log all of our purchases on Quickbooks, which was made easier by using a check printer attached to my accounting computer (this in the days before online payments).   Suddenly, I realized I was spending a lot more money on my business that I should have been, and moreover had no real "business plan" in place when hiring people other than "we are busy, we need to hire more people" rather than, "we can afford to hire X number of people for Y dollars" which is how it really should be done.

I started using the program in my personal life, at first for major bills and purchases, but eventually for everything we spent money on.   It was a revelation.   To begin with, if you don't enter every single credit card transaction and check purchase and ACH debit and whatnot, you don't even know if you are spending money.

Negative-option merchants rely on the fact that most people simply glance at their monthly credit card statement and then pay the bill without looking or thinking about individual transactions.   When you log each purchase daily, you realize how much you are spending, and also realize when a fraudulent transaction is taking place.

Online solutions and bank websites help, of course, but they can be a trap.  For example, Bank of America sends me e-mails every day alerting me to any credit card charge, check, debit, bill payment, or deposit.  They also send a daily update of my balances.   So it is easy to detect if a charge comes through that looks funny.   But to rely only on this or using the online site to "balance" your account is dangerous.   In order to "balance" your account, you have to reconcile it with a separate record independent of the bank's records. 

Merely looking at and checking off items online isn't "balancing" anything at all, any more than looking at your monthly credit card bill and making a payment is "balancing" your credit card bill.

Moreover, when you balance your books on your own computer or device, using your own software, you know not only the current balance but also what your available balance is or will be with outstanding obligations.   Your bank's website can't tell you about a check you've written until someone cashes it.  It can't tell you about a credit card charge sometimes until days after it was made.   With your own software and own accounting books, you can tell in advance whether there is enough money in your account to cover the check or debit you just made. 

Thus, bouncing a check becomes nearly impossible.

There are other advantages as well.  If you log each purchase and categorize it (which is easy to do in Quickbooks or other programs, which "remember" what category you used for a merchant the last time) you can run reports at the end of the year and see how much you are spending on cars, food, restaurant meals, liquor, hobbies, electric bill, and so on.   It often is a startling amount.

We all like to lie to ourselves about money and other things.  As I have noted before, men lie about two things primarily - their gas mileage and penis size.  I see men with gas-guzzling motorhomes tell me they are getting 15-20 miles per gallon.  The size of the lie about that tells me their penis must be particularly small.

But we all do it - we round down on expenses and round up on income.   We don't want to really think about how much our hobby car is costing us, because we'd just weep at the waste of it all.   I recently bought a $299 golf cart "buggy" and so far we have nearly $1500 into it with a new controller.   I talk to other people with fancier carts and they say they spent $5000, when clearly they have closer to $8000 or more into it.   For what they could have spent buying a secondhand car, they bought a golf cart.  And no one wants to think about that!

I use Quickbooks as an example, only because I have a "paid-for" copy of the software from many, many years back (No, you don't need to "subscribe" to software or update it every year).  There are other programs out there you could use.  The main point is to reconcile your accounts and to categorize spending.  When you do this, you understand "where all the money went" and you realize how small expenses can add up.

For example, restaurant spending can be considerable.   I log this and am chagrined to see we spend as much on restaurant meals as we do on groceries.  And we do not eat out very much, either.   Some folks eat out five times a week or more - folks I know.   As a result of this awakening, I try to eat out far less often than I used to, and when I do, it had better be more than a refueling stop.  I also try to look at the cost of menu items and split an entree when possible (also better for your health as well) as so many restaurants today have huge portions, and it makes no sense to spend $15 on an entree and leave half of it behind, or worse yet, take it home in a clamshell.

Logging spending made me realize how much I was squandering on cars as well.   But that category illustrates where logging your spending might not give you a complete picture of overall costs.   Depreciation is not shown on your Quickbooks accounts, so you don't realize that you are losing thousands of dollars a year on a car that is just sitting in your garage and depreciating - costing you money even if it is doing nothing.

You can't control that which you don't measure, as one reader put it.  And measuring spending, on an item-by-item basis, is key to controlling spending and accumulating wealth.

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