Wednesday, January 4, 2012

Review of basic money management

I had never realized how much trouble a person can get themselves into if they own a business and don’t keep track of their finances. Business owners can be turned off by paperwork, but paperwork is what helps them make sure they aren’t cheating someone else or being cheated.

A business that deals with the same customers over and over and the same vendors over and over will have many bills and many invoices to keep track of. Invoice numbers make it so that you know you aren’t being billed for the same thing twice or billing someone else for the same thing twice. Check numbers make it so that you know you don’t pay for the same thing twice.

I know a business owner who uses software for invoicing his customers and tracking his expenses, but unfortunately he hasn’t mastered the personal management skills that will allow him to make full use of it. The consequences make it difficult for both him and his employees.

Let’s review some basic habits that everyone must have in order to manage their money at a fundamental level.

1) Carry a checkbook with you, along with your debit and credit cards.

2) Carry a check register of some sort. (You can use a paper one that is provided in every box of new checks, or you can use mobile software of some sort.)

3) When you buy something, IMMEDIATELY record the date of a purchase, (the check number, if applicable), the person you paid, the amount you paid, and what it was for. (Recording what the purchase was for can help you track your spending, when you are prepared to make a budget.)

4) Subtract out the total in your check register. This means that you should always know exactly how much money is in your account at any time. It prevents you from incurring bank fees for overdrawing your account.

5) Reconcile your accounts every month. This is nothing more than making sure that every purchase on your bank statement is represented on your check register for the same amount. The more careful you are to record your purchases, the higher the chances that any unexpected charges on your bank statement mean someone has gained unauthorized access to your bank account. Reconciling carefully allow you to find irregularities and mistakes and even dishonesty.

What are the consequences of ignoring these rules? Let’s think about them.

What happens if you don’t carry a checkbook with you? You tend to depend on your debit card or credit card or cash. In my opinion, none of those have a built-in transaction record like checkbooks do, since checkbooks can have a register attached to them.

What happens if you don’t carry a check register with you? You tend to accumulate receipts, and then you have to find some time to enter them into your check register at home. That means that your mental notion of your account balance will grow fuzzier and fuzzier and more inaccurate over time, leading to higher chances that you will overdraft your account without knowing it. It also means that if you lose a receipt or crumple it up so it becomes melted in the sun and illegible, you will lose your record of the transaction and your accounts will be thrown off until you reconcile your accounts at the end of the month. (This happens far more often than people realize.)

What happens if you don’t even keep a check register? In order to know the balance on your account you have to check your bank’s website every so often, and even then it may not be completely accurate if purchases take time to show up on it. The risk of over-estimating how much money you have increases. The importance of keeping a sizeable cushion in your account to prevent overdrafts increases.

What happens if you don’t reconcile your accounts? If someone were to highjack your bank account, you wouldn’t know it until terrible damage was done.

Just because we live in the age of the debit card and credit card does not mean that it we shouldn’t be recording our purchases and keeping track of our spending. If anything, it means we need to be even more careful and methodical.

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