Using Personal Financial Software

A recent poll by Harris Interactive found that 53% of internet users do not use the internet for financial management and investing and 60% do not use it for paying bills. This is surprising because if there is one activity that the computer and the internet are really good for it is for managing one’s finances.

Are you someone who has not yet tried using their computer to manager their finances? If you are, then read on to learn about our experience with these products.

Our Experience with Quicken

We first began to use personal finance software in 1996. We have been using Intuit Quicken Deluxe, though we understand that Microsoft Money has similar features and is at least as well liked by consumers as Quicken.

When we first started with Quicken, we were looking for something that could help us develop a personal budget. We knew from past experience that the easiest way to develop a budget is to review your spending pattern over a few months first.  Quicken makes it very easy to track and analyze spending.

In 1998 we began to use the product for online bill paying and eventually consolidated most of our finances with one bank as, at the time, few banks were supporting Quicken downloads for checking, savings, and VISA accounts.

What is it like to use Quicken?

When you first start with one of these products you find that they use a checkbook style register to track spending, with one register per bank or credit account you happen to hold. If you are like most people, you probably find that you are paying for things out of different accounts. You may, for example, have a checking account for routine spending, save up in your savings account money to pay an annual property tax bill, get a loan to buy your home, use a credit card to pay for large expenditures over several months, and so forth. Quicken easily supports as many accounts as you wish to track.

Keeping track of account transactions is great, but, the real power of these products lies in their ability to classify each entry in the registers by a transaction type. For example, it is possible to classify the gas bill as “Utilities:Gas & Electric”, auto gas bills as “Auto:Fuel”, life insurance payments as “Insurance:Life”, etc. It is also possible to enter your net paycheck but also to assign to the transaction a breakdown of the various taxes and deductions that explain the difference between your gross and net pay.  This typing ability allows you to clearly see in the Quicken reports where you money is going.

What does the typing do for you? It allows you to see spending by transaction types (e.g., Gas & Electric costs), by account (e.g., how much you paid out of a particular savings account), payee (e.g., anything paid to your regular grocery store), and various other combinations (e.g., all Utilities, all Auto costs, etc.). You can also define categories such as mandatory spending, household expenses, long term savings, etc., so you can separately track major portions of your budget and easily isolate particular problems. Recent versions of Quicken even allow you to separately classify transactions by the person they were for.

Having several ways to sort, organize, and view your financial data is the key means for you to be able to figure out what is really going on with your personal financial picture.

How to Get the Maximum Benefit from Quicken

When you start out with Quicken, it can seem a bit confusing.  It has so many options to choose from, and, you may not know what you have to do to get the maximum benefit from the program.

Here is our list of things that you should aim to do with a personal financial software program:

1. Track all your financial transactions in Quicken
   This has become a lot easier now that banks and investment companies are providing online updates of financial transactions. When you use the online updates, it becomes possible for all transactions posted by the bank to checking, savings, or credit card accounts to automatically be entered into your Quicken registers. Many of these transactions Quicken will automatically associate with a transaction type. And, it is possible to set up scheduled transactions for items such as your paycheck or house payment—items which may involve a mixture of income or expense types—so that Quicken can easily track the breakdown of expenses in the matched, scheduled transaction rather than in the single expense type that the bank’s transaction info provides.
   
   Quicken will also automatically reconcile your register with the bank's information which nearly eliminates the need to ever reconcile your check book (though it is still a good practice to reconcile your accounts as banks do make mistakes from time to time).  Quicken can also be set up to get information from multiple financial institutions so that you are able to use different banks and investment firms.
    
2. Convert as many Routine Expenses as Possible to Automatic Debits or Online Bill Pay
   It is now possible to have nearly every monthly bill set up for an automatic debit paid by you bank. This includes house payments, utility bills, auto loans, etc.  Many banks and Quicken also have their own online bill pay services that allow you to easily pay bills online and set up recurring payments (monthly, quarterly, etc.).  Things like credit card bills can be set up for a fixed payment every month under an automated bill pay program if you know what your balances are. And, you can also set up automatic payments to investment accounts, savings accounts, etc., either by using a banks automatic debiting system or automatic bill pay services, a great way to make sure you're taking care of your own retirement.
   
   Automatic payments often are free from banks and other service providers, particularly if they are "charged" against a bank credit card or debit card.  Online banking typically comes at a fee of $5 to $10 per month, but, the fees may be waved if you maintain a minimum balance in your account.
   
   When you use automatic payments and online bill pay, it is a good idea to maintain a cushion in these accounts as variable expenses such as a phone or heating bill can surprise you, taking your account below its minimum at the wrong time.
    
3. Make Maximum Use of a Check Card or Debit Card
   One thing that helps a lot is to make greater use of a check card or debit card for routine expenses such as gas or fast food rather than cash. The bank will show these transactions with payee information such as “Texaco-305 South Main St.” and Quicken will often also provide a transaction type such as “Auto:Fuel”.
    
4. Review and Reclassify Transactions Regularly
   Written checks often will have no payee or transaction classification supplied by the bank. Many stores seem to change their payee information often, which can cause your financial software to incorrectly classify a transaction. And, some transactions need to be broken down into different types of expenditures. For example, if you are tracking “Gifts Given” and buy a gift along with groceries or household items, you will want to go back in and have the expenditure broken down into two or more individual items. This takes work, but, the more you do it, the greater will be your confidence that you understand how your money is being spent and where there are real problems or opportunities.
    
5. Develop an Annual Budget
   Quicken has a tool for developing budgets quickly. You can either specify an average amount per month, or, specify monthly targets for each transaction type. You can also develop new transaction types and your own master categories for grouping and summarizing specific types of transactions. What we have done is use one category each for “Income”, “Mandatory Expenses”, “Routine Household Expenses”, “Discretionary Expenses”, and “All Other”. Each transaction type is then assigned to one of the above categories.
   
   With practice, you will find that you can easily forecast income and mandatory expenses such as insurance costs, paycheck deductions, auto payments, etc., set and hold spending to a target for routine and discretionary expenses, and, keep track of unusual or one time expenses in a catch-all category like “All Other”.
    
6. Create Non-Cash Asset and Liability Accounts for Net Worth Reporting
   Tracking the equity in your home or other major assets such as for cars, life insurance policies, or collectables is important for several reasons. First, with assets, you may need to liquidate an asset in an emergency. Knowing what you own net of liabilities—that is, your net worth—is how you can tell what you can convert to cash or borrow against in a pinch. Second, some assets such as cars depreciate rapidly during the first years of ownership. Depreciation is a real cost as anyone who has tried to sell a one year old car quickly finds out.  The only way to understand this is to track depreciation rather than just an auto loan payment.  Lastly, you will want to see large future bills such as an annual tax bill as a net deduction versus your cash and credit balances to avoid having an exaggerated idea of how much of a cash cushion you really have.
   
   To track your non-cash assets and key liabilities, get in the habit of creating asset accounts for major assets such as your home and automobiles and incorporate charges to these accounts into your scheduled transactions.  You can, for example, create a recurring, monthly or yearly, non-cash depreciation charge against each asset account. Similarly, auto loans and mortgages may be tracked as liability balances which are reduced each time you pay the combined interest and principal to your bank.
    
7. Come Up with an Easy Method for Tracking Cash Spending and Small Expenses
   To keep track of cash spending you can use various methods. One is to treat any cash transactions as just “Cash” and only use cash for certain types of spending (e.g., lunches, gas, etc.). Another is to keep a list of cash expenditures by type and then once a month create a reconciling transaction that subtracts total cash spent and adds a breakdown of expenditures (for example, -$150 cash and +$58 for lunches, +$82 auto:fuel, +$20 personal care). A third way is to create a separate account for cash which you reconcile each month. This is a complicated way to do it, but, if you really want to count every penny and know where it is spent, the separate account method is very effective.
   
   Small expenses such as magazine or newspaper subscriptions may not be worth much effort to track closely and so can be classified as “miscellaneous” transactions.
    
8. Become familiar with the Standard and Custom Reports
   Quicken and Money both produce a variety of standard reports, some of which can be confusing. The Quicken reports we have found most useful include the Monthly Budget Report and the Account Balances Report.
   
   The Monthly Budget Report will give you a total of transactions for each expense type for the month or year or portion of either, show a corresponding budget target, and calculate the difference between actual spending and your budget target. Any entry that looks out of whack can be quickly studied by clicking on the summary for the transaction type to bring up a list of the individual transactions. From there you can decide whether you have an incorrectly classified transaction, a problem with the budget target, or simply spent too much or too little.
   
   The Account Balances Report can give you a quick overview of your cash position, loan and credit balances, long term savings, and any big liabilities you have chosen to enter.
   
   Just these two reports are enough to remove any uncertainty you or your spouse may have about what is going on with your personal finances. And, if these reports do not give you the answers you need, it is very easy to develop customized reports that isolate only certain types of transactions or certain accounts.
    

How Hard is This to Do?

You are probably wondering how much work it takes to do all this and/or how complicated it is. The simple answer is that it takes as much work as you care to put in to it and can be as simple or complicated as you like. If you do what we have done—which is to have all of our financial transactions downloadable from financial institutions online and only fix classification errors every few months—then you can see what is going on virtually every day even if you don’t take the time to fix incorrectly classified transactions. This will make it difficult to understand how your spending relates to your budget. But, you can see how much money overall is going in and out of your accounts and it is very easy to go back at the end of the month or year and reclassify any transaction’s type. You can catch up when you have more time available.

Overall, products such as Quicken and Money have been used successfully by millions of consumers in a wide range of situations. The initial effort required to get  these products going is perhaps five to fifteen hours of work. But, after that, all that is required is just a few minutes every couple of days to completely manage all of your personal finances and to do so from the comfort of your own PC.

You are probably already doing much of this work in your head and spending quite a bit of time doing things like writing checks, reconciling statements, and opening bills that you know you are just going to pay each month anyway. Once you apply some of the techniques described above, you will find that most of the administrative work goes away and you can concentrate on figuring out whether you are spending money in the best way possible.  That is, you'll be spending less time than you do now, you'll have greater peace of mind, and you'll almost certainly get better results.  It seems to us that these personal financial software products are what domestic automation is all about.

Recommended Personal Financial Software & Books: 

Quicken 2005 Deluxe by Intuit This version of Quicken includes standard accounts and reports for managing your checking, expenses, and budgeting plus functions for keeping track of investments such as stocks and 401K funds. Intuit often offers rebates of as much as $20 on this and other Quicken products.  Several other versions are available including Quicken Basic (shown below), Quicken Premier, and Quicken Premier Home & Business.
Microsoft Money 2005 Deluxe by Microsoft This is the newest version of Microsoft Money Deluxe.  Improvements in recent versions of Money make the choice between it and Quicken something of a Coke versus Pepsi decision. Below is a link to the less expensive Standard version.  Rebates are commonly available for the Microsoft Money product line too.
Quicken 2005 Basic by Intuit This is the most basic version of Quicken.   in its newest version.  It lacks some features of the Deluxe version such as investment details, but, works fine for many people.
Quicken 2005 The Official Guide by Maria Langer Langer has been writing Quicken guides since 1999.  Others have commented that this book is clearly written with good screen shots and instructions, particularly aimed at the new user.
Microsoft Money Standard 2005 by Microsoft This is the most basic version of Microsoft Money.

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