What the title describes, ‘Personal Finance Starts With Accounting!‘, may be obvious, but it is often an overlooked area of everyone’s finance. One’s ability to handle their accounting will define their ability to manage their finances and more importantly, it will define how well it can be optimized for profitability.

How long does it take for someone to realize they have a spending issue with credit cards?

Budgeting

Budgeting is often the first subject discussed to start getting a grip on your finance but the reality is that it is dependent on your accounting and ability to maintain good accounting. Income Taxes are also dependent on good accounting but for the average person, the accounting burden is passed on to the employer and all an individual need is to use the forms received and plug in the numbers.

What I am trying to highlight here is that until you have figured out how to manage your accounting, your budgeting is really undefined or very basic. I remember the days where I had a booklet for tracking my bank accounts and the branch would slide my booklet under a printer to update my account. Remember those days? Those were the pen and paper days. Now we have online accounts with instant tracking but we don’t have instant categorization. It’s a lot easier to see what comes in and what comes out but we also tend to have multiple accounts and we have a need for aggregating that information into one area.

I’ll admit that I use Quicken (Quicken Deluxe 2011) for all accounts aggregation. I download all transactions to it. All the manual accounting pertains to my trading accounts. I started small with a handful of accounts and I have over 30 different accounts now that need to be put together with some in Canadian currencies and others in US currencies.

Budgeting can be done without detailed accounting since you can easily estimate how much you earn per month and how much the fixed costs we all have are such as rent or mortgage, car cost, insurance cost or utilities. However, as much as it can be done, it becomes difficult to really optimize without knowing where all the money goes. How much of your credit card bill is utilities versus eating out versus clothing? It shows up as one expense on your monthly bottom line. Wouldn’t it be cool if the credit card company could warn out up front that you are exceeding your budget mid month on clothing? That would be a game changer for budgeting! You would question the purchase right then as opposed to 3 weeks later when you get the bill.

Treat Yourself as a Company

This is an example I often use with friends and co-workers. Companies have to be profitable, otherwise they will go out of business. The same apply to you. You can have short and/or long term debt on a balance sheet but for survival, you’ll need to bring in money to cover the cost and expenses from month to month. The more you can have left at the end of the month, the better.

If you can put emotions slightly out of the way regarding your personal spending and look at it from an accounting perspective, the numbers tell a story. It’s the story that you want to get behind to optimize your profitability. If your accounting is not in place, you probably can’t see the true story. One of the primary job of an accountant in a corporation is to look for savings and set budgets to maintain profitability. That’s the hat, an individual needs to put on at times to look at personal finance. You might need to have a heart to heart conversation with your alter-ego.

The Devil is in the Details!

Getting the right accounting formula may be a challenge but don’t despair. Tracking every little details may not be important when you start and it may never be important. You need to track enough information to make educated choices regarding your finances. When I started, I was tracking the chocolate bars I was buying… That was insane! I could not keep track of that. I started to track cash I use from the ATM instead. What I did with that money was not as important. What was important was how much cash I needed. Once I knew how much I needed, than I could look at it and say ‘That needs to change’ or ‘Not bad, I am doing good’. This is where a good budget can help assess how you do but you first need to categorize it.

If you happen to do all your banking with the same bank, including your credit cards, then your accounting can be simpler. Otherwise, you are probably getting a number of monthly statement from different accounts. How are you organizing them to assess profitability? Profitability is what you earn this month minus your expenses. One interesting exercise would be to take all the money left over in your account at the end of the month and move it to a savings account and see if you can pay all the bills every month by moving the excess away. If you can’t, then you are spending more than you earn and the idea behind accounting is to show that before it’s a problem.

Readers: Can you wear the accounting hat? Or do you prefer someone else does it?

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