As we enter the thick of tax season (I just filed ours this past week), I thought I'd write a short bit about my own take on financial literacy. This idea was originally sparked when I read an article last year about Why Financial Literacy Matters from a more education-based perspective. I suggest giving it a quick read.
I've followed (by way of RSS feeds, primarily) a few financial bloggers and writers for the better part of the last decade. The follows ebb and flow, but one that has been constant throughout is Trent Hamm of The Simple Dollar. Admittedly, after all these years I may skip over certain articles, but what I've always appreciated about Trent's content has been a consistent use of emphasis and structure in his writing. This makes his content super easy to follow and skim, even when it's heavy or lengthy (and it often is, though not in a bad way).
Rather than blather on about those things, though, I wanted to write about a specific component of financial literacy: information management and tracking.
Where To Start?
One of the things that I've personally struggled with (and know others in the same boat) in the common theme of budgeting is a meaningful starting point. To be honest, to this day I don't have a proper written budget plan for any period of time. Shame, I know, but hear me out...
My primary problem with a budget is that by virtue it lacks the sort of flexibility I desire, at the same time requiring all of the information up front to be successful.
If you're just starting out and the first piece of advice you consistently read is 'start a budget,' you're almost undoubtedly set up to fail before you begin...unless you have already done the requisite information gathering.
Right Track, Wrong Train
There's no right or wrong way to track your income and spending patterns. What works for some
may will be absurd to others. Whatever you do: be intentional about the attempt. If you want to do something electronic (or via an app), great. If you're totally analog (paper and a shoebox), cool. If you're insane and want to cut your teeth using a double-entry accounting system, God bless you.
Be open to changing your tracking mechanism if after a month or so you decide it's too burdensome...or doesn't give you the right info.
Some ideas commonly thrown out there:
- Pocket notebook (just writing stuff down)
- Excel/Google spreadsheet
- App-based product (receipt scanner)
- Spending tracker (something that automatically analyzes bank statements, etc.)
- Receipt box (save them for a period of time)
- Proper accounting system
Long gone are the days where simply balancing a checkbook (or trusting the check register/duplicates) was generally sufficient. That totally worthless-seeming high school course you were required to take wasn't all bad...and is still a good starting point, but it's far from a panacea of tracking. The tight coupling of multiple banks (including online-only), credit card accounts, and everything else makes a simple check register less valuable than it once was. After all, who even writes checks anymore? In the last twelve months, I have written fewer than 18 checks. Twenty years ago, I might have written 18 checks in a week.
My Tracking Journey
A little over a decade ago, I decided to take some action in how I kept track of the bigger financial picture. Sure the check register thing worked alright, but it was far from a great insight into actual spending patterns anymore. Too many various accounts, too little fidelity in the information on a statement. If I wanted to see real data on spending, I would need to do something very different.
I Chose Receipt Tracking
Since they are almost ubiquitous anyway, I just stacked the receipts off to the side for a few weeks. They have all of the information about a purchase anyway, so it seemed a natural place to start for me.
What I quickly discovered is that the information on any given receipt provided more than enough detail for me. They can, however, pile up quickly and become their own mess if not addressed in a timely-enough manner. The question was now: how do I organize this information in an actionable way?
I intend to write about GnuCash in the future, and it's certainly not for the faint of heart. It's free, open-source, incredibly powerful, and allows me to drill into great detail once set up.
I had a few failed starts with GnuCash over the first few weeks. Most of that was in wrapping my head around how double-entry bookkeeping works (I am decidedly not an accountant), which requires a place for everything. I'd set up some bad categories/accounts, and it can be difficult to recover from that action out of the box...so I started over several times. Fortunately, it does come with a nice start wizard and set of accounts that are likely to get you started in a meaningful way. I just chose to ignore those parts the first few times. Don't be like me — use the wizard for best results.
How Does Tracking Actually Work?
For me, after the initial first two months or so of using GnuCash (when most things were fully set up), the component of tracking (data entry) usually falls as a weekend activity. I take all of the receipts since the last time, sort them by account (credit card, etc.), and enter them. What I like about this model is that I get a level of granularity that doesn't come from just tracking the merchant. Take a Target receipt, for example. We might purchase clothes, food, toys, cleaning supplies, and a household appliance. In the same visit. If I just called Target purchases 'miscellaneous' (as I did in my previous system), I lose all of the fidelity. What the hell does miscellaneous even mean anyway? Don't use miscellaneous as a default-ish category — it doesn't mean anything. Use extremely sparingly.
A typical Target receipt entry nowadays usually has four or five categories, which will give me enough detail to review actions and make adjustments as necessary at the macro level (across all accounts/transactions). This model applies to more or less every merchant we visit. For the hell of it, since it's already on the receipt anyway, I also include sales tax as a category. It's interesting data on the analysis side.
Since GnuCash remembers previous entries, the process of entering receipts usually takes less than ten minutes every week or two. The initial setup was gnarly, but the maintenance is a breeze. Sometimes I'm not able to get to receipt entry for several weeks (or close to a month), and then it starts to be more painful. Again to the intentionality, choose something that generally works for you and form the habit. If it's always a pain in your ass, it's not going to be done.
Piles Of Data
After just a few months of tracking, I had a pile of good, actionable data that can be used to inform a budget plan or other adjustments. Data better analyzed in the bigger picture. Especially when I started to have years worth of data available.
I have several reports saved that I can generate at the click of a button. One such report is one I've customized to help me plan for my annual Flexible Spending Account (FSA) election. I can generate a report of year-to-date qualified FSA expenses, the five data points of which I enter into a super-simple spreadsheet to give me some averages (1-, 3-, 5-, 7-year, and cumulative averages). This way it's easy to figure out what to elect for those odd years when someone needs glasses, or braces, or such.
Additionally, the data can show me larger spending patterns. How did the last x months compare to last year (or last quarter)? What was different in life then? It's a clear picture of what's going on, where it's going, and where it's coming from...where 'it' is money. What might seem like a huge change in a month/quarter/year is likely easier explained when looking at multiple months/quarters/years as an average. 'Holy shit we spent a bunch of money on...' might now become a 'Oh yeah, last year we spent more than normal, but we replaced ____...so it's a blip, not a pattern.'
This data helps lead to...
With this data, I was able to comfortably set several things on autopilot. This has become the real advantage of a larger system. Reminders, auto-payments, auto-transfers, automation accounts, and so forth. Rarely do I need to look at the data sideways and go 'where the hell does that come from this month?'
I've queued up some future automation-related topics that I'll write about separately. My favorite angle of this all has been the 'automation account' component, because to me it's become the 'free money' account. Stay tuned.
Though it generally goes against the common recommendation, I am a firm believer of budgeting after the data is in place. As noted, I still don't have a proper, written budget in the traditional sense. I do, however, have a holistic and detailed grasp on the bigger picture. As such, I actually do have a budget in place...just not in the traditional sense. Mostly due to my accounting system and its reports.
These tools and nuggets have bolstered my own literacy to the point where much is on autopilot or requires little touch. More valuable, though, is that the spending patterns can be assessed and evaluated, sometimes with great granularity. So unlike Past Me (10+ years ago), Current Me is data-driven, evaluative, and tuned-in to both the macro and micro levels of the bigger financial picture. Anyone can do this (and everyone should), but they have to find the mechanism that works best for them.
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