My Best Financial Tip
When I decided to join this initiative, I racked my brain for a unique tip that would show my brilliance and ingenuity. However, the more I thought about it, the more I realized the best tip I can give anyone is to “build the foundation of financial discipline”. The conduit for building financial discipline is reconciling your bank account using Quicken software (no, I don’t get paid for mentioning Quicken or reproducing the image to the right) or a similar product.
I have used Quicken for years and its beauty is its relative simplicity. It is a simple single entry bookkeeping system. By single entry I mean you don’t have to know the debit and credit stuff you ignored in your grade ten accounting class. You just need to input the comings and goings in your bank account, some of which can even be downloaded directly from your bank account.
The first step in a staircase of financial discipline is reconciling your bank account on a monthly basis (weekly is better, but I won’t push my luck), so you know how much money you have earned, how much money you have spent and how much money you have saved.
Once you get into the routine of inputting and reconciling your bank information, it is easy to take it up a notch and climb the staircase of financial discipline, by using your financial information for budgeting, tax return preparation, debt reduction, investing and retirement planning.
Let’s take a brief look at these benefits separately.
Once you have established the routine of reconciling your bank transactions, you will have all the information required to budget. Simply print a spending report for the prior month by itemized categories. Instantly you have a visual of how you spent your money. Knowing where and what you spend your money on is vital in preparing a budget (or your budget can simply be last month's spending report, with revised numbers and objectives just written in ink beside last month's numbers). Once you review your spending for the prior month, set a $ value goal for your next month's spending that is say 5-8% less than the prior month. Using a budget to control your spending is the second step in your financial discipline foundation. At the end of each year, print out your spending report for the calendar year. You will probably feel sick when you realize how much you spent on one or two items throughout the year. For me, each year I get nauseous when I review my automobile costs. The annual document can then be used to budget year over year and should be kept to compare to your next year's annual print-out.
As per my blog post Debt - An Ugly four Letter Word, personal debt is the number one problem in Canada. Where debt is not the result of losing a job or having your business fail, it often arises because of reckless spending (not in all cases but in many). That spending can potentially be reined in by creating a budget. The next step in building your foundation of discipline is to use the money saved by budgeting to start to pay down your debt. It should be noted that one of the versions of Quicken has a debt management component.
Once you have the discipline to reconcile your bank account, you now have all the information you need for income tax. Every income tax season I see deductions and credits thrown out the window because clients have not maintained proper records and/or kept the required documents.
Form T2200), you will have a summary of your deductible employment expenses on your spending report.
The fourth step in building your foundation of financial discipline is using Quicken or whatever software you choose to track your investments. One of the biggest problems my clients have is tracking the cost of their investments, otherwise known as the adjusted cost base (ACB). By using software and diligently inputting all your investment data, you will always know at the click of a mouse your ACB for any investment. In addition, you can tax plan knowing your unrealized gains/losses, dividend and interest information is neatly laid out and available anytime.
One day I decided to try and determine how much money I would need to retire, a daunting task. However, as I thought about it, I realized this was actually a fairly easy task. I printed out my yearly spending report by category for the last two years. I then went through each category determining how these expenses would change when I retired. Certain expenses were quickly eliminated, such as spending on my kids University and lease payments (I intend to stop leasing and purchase a car several years before retiring), while other expenses such as clothing and certain types of insurance would be substantially reduced.
Once I knew my anticipated expenses, I could project various retirement scenarios based on longevity. The point being, by having the data readily available, because I was disciplined enough to track the information, I had enough information to at least provide a crude estimate of my retirement needs.
As you can see, building the foundation of financial discipline allows one to progress from just tracking your bank account to determining your retirement needs. However, it all starts from step one, tracking and reconciling your bank account regularly. So as Al Davis would have said, "Just Reconcile the Bank, Baby".