Blog for Financial Literacy - Build the Foundation of Financial Discipline - Just Reconcile the Bank, Baby

November is Financial Literacy month in Canada. Today, many Canadian Bloggers have joined together to support the Blog for Financial Literacy campaign by agreeing to write a post on “My Best Financial Tip”. It is hoped the various “tips” will contribute to raising financial literacy throughout Canada. Kudos to Glenn Cooke of The Term Guy for putting the campaign together. Having put together the Bloggers for Charity campaign last year, I know the time commitment required.

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.

 

Budgeting

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.

Debt Reduction

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.

Income Taxes

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.

Want to know your deductible child care? Just go to your spending report for the year and look at the amount you spent during the year (you should then ensure you have invoices to support your child care payments). Want to know how many donations you made, just review your yearly spending report and then follow up on any missing donation receipts. The same goes for medical expenses. Review your spending summary for the year and ensure you have medical receipts that match those totals. If you claim employment expenses (your employer must sign a Form T2200), you will have a summary of your deductible employment expenses on your spending report.

Investments

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.

Retirement

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".

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

Budgets and underestimated household expenses

On Tuesday, Roma Luciw quoted me on "Nine expenses you underestimate" in her article in the Globe & Mail. Today, I am posting the entire blog, including those nine expenses, as I think my discussion on creating a one-month budget is important. For anyone who is a "Where's Waldo" fan, see if you can spot the obvious edit the Globe and Mail made to the original nine household expense item descriptions.

I often get calls from clients and potential clients requesting a consultation to discuss their family spending and family budget. Once we set a time for the meeting, I request that prior to the meeting, they prepare a best estimate summary of their spending. Unfortunately, I know this request will most likely not be fulfilled because; (1) most people have no tracking system for their expenses, (2) many summaries are missing so much information that they are virtually useless, or (3) the appointment will never happen.

I find it truly amazing that so many people are so averse to budgeting and tracking their spending and they remain so even after a triggering event that causes the initial phone call to set up the appointment. Not only are people averse to budgeting and tracking, they are also a little lost when it comes to their current habits. When I have the chance to meet with both spouses, I like to ask them to estimate how much they think they spend a month. Typically, one spouse has an idea of how much they are spending while the other spouse is not even in the neighbourhood.

What really drives me around the bend is that with minimal effort, it is possible to make much better decisions. Even if you track your expenses for only one month, you will have a baseline for most of your spending because 75% or more of your expenses are likely recurring monthly expenses of the same or similar amounts. If you only track significant expenditures after that one month, you will have a fairly accurate budget for the full year.

Tracking expenses is not only necessary to ensure you have enough money to pay your bills, but it is also the starting point for savings (see my blog Where did my money go? for tips on tracking expenses). Once you know what you spend, you can budget to ensure you do not spend any additional funds and you can even cut some expenses.

In general I have found people severely underestimate the following expenses:

Weekly living expenses- While each spouse may only go to the ATM one time and thus have an idea how much they spend individually, often both spouses are going to the ATM and those weekly cash expenses are significantly higher than you think.

Gifts- Most people have an idea of how much they spend for Christmas gifts as the holiday season is a condensed period of time, however, how many birthday gifts, anniversary gifts, graduation gifts, etc. do you give throughout the year? This is especially relevant for those with large families.

Charitable donations-Many people do not track their donations throughout the year. This can be problematic, especially for people who wish to give a certain percentage of their income in a particular year.

Automobile expenses- Many people fail to consider some of their car expenses. This expense quickly escalates when you include your lease, or loan principal and interest, repairs and maintenance, parking, insurance, tolls, etc.

Sin costs- The cost of beer, wine, cigarettes, funny cigarettes, is never correctly accounted for and often severely underestimated.

Kid’s programs- Today’s child is enrolled in multiple programs. In my opinion many are “over programmed,” however, notwithstanding my opinion, these programs are very expensive and add up quickly.

Cottage- Cottage costs are problematic on two accounts. Not only do you need to track the property taxes, mortgage, interest payments, repairs, maintenance, insurance and utilities, but you also often have a massive entertainment expense that even the most detailed person would be hard pressed to track.

Restaurant- For some people, these costs are not substantial, but for many double income families, these costs are substantial.

Women’s beauty costs- Often way understated, but guys, I would not even go there.

As discussed above, tracking costs is important for both budgeting and increasing your monthly savings. I strongly suggest that if you are not willing to buy an accounting program such as Quicken, you try my one month experiment and then just track your large one time expenses. It will be an eye opening experience.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.