I hope the first post didn’t scare you away already. If it did, well you wouldn’t be reading this one, but you will need a bit more iron grit than that to survive in these waters. Anyway, I think you all appreciate by now your current financial situation and what your plans for the future are. Keep them in mind as we progress through the instruction. Today you get a two-for-one deal. I wanted to get you all thinking and give you some homework!
Before we budget, before we plan, before we open even a single investment account—we need to first know what is there. Otherwise we are swatting at flies standing over manure not realizing somebody has dropped an uncut diamond in it. Let’s clear away the crap and organize ourselves, so we can better view that uncut diamond before we get to the slicing, sanding and polishing away.
As an accountant and financier I am no stranger to financial statements and accounting processes. While Mr. Festa is the master at it—I’m fairly experienced myself. Our first order of business will be to obtain personal ACCOUNTING software. Notice the ACCOUNTING! Part of that. (If you search personal financial software you will get estate planning and retirement software packages… not what we want at the moment). There are a myriad of software out there for your use—I won’t waste our time, I assume you all are capable of googling. If you directly ask me for software—don’t be too chagrined when I respond with a “let me google that for you” link.
That being said—there are a few software I am rather partial too: mainly because they are free and rather dynamic. First and for most my personal accounting software of choice—GNU Cash. GNU is both open ware and free (so called free-ware) and has a large assortment of back-end developers who can help with support if you are having trouble. However, the system is designed to be applicable to business, non-profits, and personal use—and to that extent is rather difficult to use unless you know what you are doing and are well-versed in the mechanics of dual-entry accounting systems. There are tutorials available on Youtube if you are so-inclined but this suggestion is geared towards those of you who have taken an introductory accounting class.
Others may want to steer-clear of GNU Cash and try some other free alternatives. One of the simplest—and in my opinion for that reason one of the best—is Microsoft Money. *screams of disgust* While no longer commercially available in the original form and therefore you don’t have online access, you can obtain the Microsoft Money Plus Sunset Deluxe version. Some nice features are that MS Money is immediately integrated into Quicken Intuit if you need to later—to my knowledge Quicken Personal Accounting is not free—and the fact that it provides the foundational idea of dual-entry accounting but treats the system like one great big cheque-book register. It’s hard to mess up since you are adding and subtracting, and the system is going to do that for you.
Finally a last alternative is Wave; a relatively new and free personal accounting and finance software. Some nice perks are the fancy color schemes, nice mood lighting and pretty financial reports that come immediately to your fingertips. An accountant may not care for this flamboyant application—but I can see MANY Gen X, Gen Y and Gen Zs will love this sort of front end visual experience towards their finances. I have had very little experience with Wave, so I offer it as an alternative with the express caution that—you are on your own if you mess something up. Contact support they can help you.
You are also welcome—if you already own them—to use other accounting software. At the VERY least, you may use MS Excel. However, this often leads to errors where most accounting software will not allow you to miss-balance the books; Excel has no cell-to-cell relationship automatically built in and you can easily make your assets not equal to your debt and resulting net worth—a situation we want to avoid at all possible costs.
Why do we want to do this?
So why do we want to go to all the trouble of downloading, installing, setting up the chart of accounts, etc. Can’t I just use my head? Well sure, you can use your mental calculations, your bank and credit statements and in the end you will wonder how much you spent on groceries and how much on gas…oh and did I make that credit card payment yet or was that next week? Wait, the bank pulled money from my savings account to meet the checking account over-draft? Gets pretty complicated now doesn’t it?
We want to keep a constant, up-to-date, clean and managed list of our accounts. This ensures a few things. 1) we ALWAYs know where our money is and HOW much money we have—exactly to the penny ( you can skip the pennies when you earn more than a penny per second…i.e. when you have an investment account of roughly $6.3 million) 2) we will never EVER over-draft our accounts. I have NEVER to this day over-drafted a bank account or gone over the limit on a credit-card. While the bank can place over-draft protections on your account to stop this from happening and you wouldn’t incur the fee—you should never get close. One way to ensure this—know exactly what is in your account and what is going to come out of it in the future. Accounting software systems allow us to do that in a slick and clean way.
A few other reasons that are beneficial but not entirely necessary: they can provide you with quick reports of income and expenses: automatically categorized. They can show your assets, liabilities and investments and the resulting net-worth value (the artificial dollar value of how much you are worth as a person.) Many of you may currently find your net-worth is negative. Congratulations, you are currently a Faustian. Your life is OWED to someone else, and you are worth nothing—in the pecuniary sense. Joking aside, this is a serious situation. While you are WORTH something—and that worth is most often not defined by your dollar value or the amount of money in your bank—this situation should raise red-flags with war-trumpets or oboes playing a dirge depending on your outlook.
A negative net-worth is defined as technically bankruptcy (balance-sheet insolvency)—you simply have more liabilities than assets; a situation we forever want to get out of and avoid into the future. Later we will discuss another type of technical bankruptcy (technical insolvency) many Americans are doomed to perpetually remain in —cash bankruptcy (cash-flow insolvency). We will also later review types of actual bankruptcy if you should ever find yourself in the regrettable—but sometimes best move—situation of declaring same.
My last reason: you will be too busy balancing the books to spend the money. 😉 This is my personal favorite reason. Considering dual-entry accounting is one great big Sudoku or logic puzzle—you get a daily brain workout.
Your homework from this post: go download these soft-wares or find one that suits you personally. Play around with them, if you can figure out how to set up a list of accounts—great! You will want to enter all the current bank, credit-card, loans (student, car, commercial, mortgage, etc.), that you currently have. Also be sure to include any investment accounts or other assets (car, house, corn-husker, wheat combine, etc.). In the next post I will teach you the basics of dual-entry accounting, in a way that I have taught even little children to use the system. There is very little memorization, it’s all a big Sudoku! Mastering this is important to mastering accounting on the basic level and mastering financial accounting is necessary to be a good VALUE investor (sic: Warren Buffet). Good luck! And happy data-entry!
In Deepest Regards,
Yours and C.