Accounting made “easy”

It started as a life project to get back the control of my financial life since I was getting nervous every month and wanted to put all this stress out of my life.

On the initial scenario I was spending almost half of my monthly income with the credit card bill and not saving a single penny. So I researched on the web and with the help of some friends / relatives that work on the financial area, I came up with this spending / saving philosophy that made me stop using my credit card, continue my life with no entertainment privation and saving something between 30 and 40 percent of my monthly income. Simply organizing and following one simple rule.

“You will only spend the money you are sure you have available.”

And this money availability is possible following this:

• The monthly scheduled bills value need to be subtracted from the current balance to reach the available money on day one, even if you still have’t paid them;
• The monthly savings are also subtracted from the current balance on day one.

This is the main rule but if you want a more comprehensive understanding about how to follow it, you can check the following sections.

Spending

When you are going to purchase a good or a service you will always need to ask yourself the main question:

“I really need this good or service? I have the money to purchase it? This money was supposed to spend on this?”

If the answer is yes for all those questions and you are not fooling yourself that purchase have a high probability of being a thoughtful purchase. (the main idea of this accounting philosophy is try to keep all your transactions on this mindful tag)

If your preview answer is “yes, yes, no”, also known as "I really need it but it will break my budgeting rule", you will need to check how urgent it is. If it is definitely important, you will need to take some money from a less important thing or a more abundant category to use it for this purchase. Just keep in mind that this is cheating and you need to avoid it. If it is not so urgent you will start doing what I call a product saving (will get into more detail later).

Still, there are some other possible answers, like for example“yes, no”, also known as "I really need this good or service but I don’t have the money right now". In this case, you will need to start saving money on a product saving that is a saving “bucket” where you save money on a regular basis, in order to make this purchase on a specific date.

There are some other possible answers like “no, yes”, also known as "I don’t need this that much I just wanted". That is a dangerous purchase, totally out of the thoughtful purchase tag. This purchase is what I call an accident and will have its own separated fund.

For all other possibilities try to think about how to make that be more thoughtful purchase as possible.

(Don’t know if at this point you figured out but all the transactions made with a credit card are not made with your money so I recommend you cancel it, so you don’t fall on the temptation of buying things without seeing your balance going down on that month.

Savings

This is probably a difficult thing to achieve but saving money on a monthly basis is the most important thing, if you are thinking about financial safety for the future. I am trying to save the most possible without interfering with my entertainment. To keep them organized I divided them in three types:

The emergencies saving

Emergency situations can happen. You can crash, you may need an expensive house repair service, you may have a medical problem or even loosing your job. So it is important to surpass these situations without the need of requesting a loan. My research points that having 3 to 6 monthly incomes saved on a liquid saving fund will give you a great security.

The future saving

To find out how much you will need to save here I recommend doing your own research since it is a very personal value. Most of the time you will try to keep them on a not too liquid fund since you won’t need them in a short range of time. If you need a starting point I recommend this post made by Adam Ting: How to retire in 10 years.

The products savings

This kind of saving is not made for safety or future but its objective is buy a certain product on a certain date in the future. To do it you will calculate how much you will need to save for month (remember that it still need to respect your available money and budgets) to be able to purchase de good or service on the set date.

Just remember that the product saving does not count on that 30-40 percent of savings I do monthly. They use available money that is not enough to buy a product right ahead that is saved for when I have enough to do so.

Budgets

The main idea for budgets is trying to keep simple and never budget all your monthly available money since we all know that unforeseen situations (with that I mean those new jeans or your partner's birthday gift) occur. Set the budgets for your regular weekly spendings like transportation, supermarket, drugstore, etc. Also I recommend you to set a value for the bigger types of spendings like hanging out with your friends or partner.

Conclusion

Following this rules after one or two months of setup is not as difficult as it seams and your brain will naturally start to follow this rules with time. You will probably need help to follow this accounting. You can use a notebook or a spreadsheet.

At the moment I am building an application for iOS & Mac (also for the other platforms later) with all this philosophy implemented and will update this post when I'm able to share more information about it.