How To: Personal Finance Part 1

The trick with keeping track of your personal finances is to keep budgets. This may sound tedious (and sometimes it is), but it also gives you the freedom to spend without worrying (as much).

You can probably do this with any number of tools, we wrote our own (being programmers), a spreadsheet will probably also do.

To get budgeting going, three things are needed:

  • Bank Transactions

    A list of your incoming and outgoing payments. This is most useful in some sort of file format, which means having online banking. Most banks will supply you transactions as a .CSV, a .QIF or similar format. You will need files for ALL your incoming and outgoing transactions, across all banks, credit cards etc.

  • Your regular bills

    You may be able to get this data from your bank transactions, use bills if that makes it easier.

  • Some time

    This thing doesn't maintain itself, sadly. An hour or so a week should be enough if you keep at it.

Getting Started

The essential aim of the exercise here is to map all of your spending to all of your income. "Spending" covers everything from actual costs to debt repayments and planning ahead. Considering saved money to have been spent is a good way to avoid using it for something else.

To track where the money goes, we create a list of budget categories, there need to be enough of them to have a good idea why each pound was spent, but not too many that its impossible to understand it all. For reference my personal list has around 50 categories.

Categories cover everything - essential spending like rent, saved money for replacing/repairing expensive items like computers and bicycles, and saving for wishlist items. Make sure you have a "Cash" category for that "I don't know what I spent it on" moment, and a "Contingency" category for overflow and balancing out overspending. Each category has a value, it's either the monthly amount you must spend (for example rent), or the amount you'd like to spend/save on it.

At the end of each month (or just after each payday, whichever makes more sense), create an "available" amount for each category. I do this by ordering the categories from most important to least important, taking my months income, and assigning it starting at the top. If there's some left over at the end, it goes in a "contingency" category, which should be the last one. If there isn't and it runs out, take money out of contingency to cover the missing amounts.

If contingency goes negative, its time to lose some of the categories and redistribute the values.

Several times a month fetch your current bank transaction data, and assign spent money to categories, each food shop, each cash withdrawal, gets added up and listed next to its available budget.

That's basically it, though I use a thrown together application and some automation for parts of the process.

I have recently discovered MoneyHub which looks like it works in a very similar way. I've been dumping our data into it, so there will likely be a review of it here soon.

In Part 2 I cover a lot more detail about how to choose categories for your personal budget.