You can’t manage what you can’t measure – it’s an old cliché, but it is very applicable to financial management.  If you are to be successful with your personal finances, you must start measuring your spending (see the article “How Much Should you Save?”), the return on your investment, your net worth, etc. The problem lies in the fact that accurately measuring your finances and keeping the measurements up-to-date requires a lot of time and effort that most people are not willing to invest.  The solution is personal finance software.  The most popular and best known product out there is Quicken.  For as little as US$30 you can buy a copy of Quicken and let this powerful piece of software do most of the work for you.

After you have Quicken installed in your personal computer, you need to set it up in order to take advantage of its powerful features.  First, you should setup your cash flow accounts, like checking, savings, credit cards, etc.  Then setup you investment accounts including brokerage accounts, mutual funds accounts and so on.  Finally setup your property and debt accounts such as your house and corresponding mortgage, your car and corresponding car loan, etc.  Next, you need to setup your income and expense categories.  Income categories include things like your salary, bonuses, your spouse’s salary, etc.  Expense categories might include car expenses, clothing, housing, taxes, utilities, etc.  Quicken already comes with a number of categories setup for you.  Here is a suggested list of income and expense categories that you may want to consider using with Quicken: 

• Transportation
• Clothing
• Household
• Housing
• Food
• Recreation
• Education
• Utilities & Phone
• Medical & Dental
• Insurance (Medical, Life)
• Taxes (Federal, FICA, Medicare, State)
• Other Miscellaneous Expenses
• Charities

The next step is to setup your securities.  These are the actual stocks, bonds, mutual funds, etc that you hold.  Once you setup your securities and enter their corresponding symbols, Quicken will automatically update the price for you as often as you like.  Finally, you will want to setup online updates so that all the associated transactions can be downloaded automatically.  This way, all your checking account transactions, all your credit card transactions, all you brokerage account transactions, etc., will be available to you in electronic format within a couple of days of the transaction date.  Now, here is one the most powerful features of Quicken:  If you purchase your groceries at Cub Foods and charge to your credit card, and you categorize the Cub Foods transactions as food, the next time you make a purchase at Cub Foods, Quicken will know that this is a food transaction and it will categorize it for you automatically.  This means that you can have most of your expenses automatically categorized for you, helping you manage your spending and compare it to your budget.

Now, there are some exceptions that you will have to deal with.  For instance, if you occasionally purchase toiletries at Cub Foods in addition to food, you will have to do what is called a split transaction, and assign your toiletries expense to its category, and the rest to food.  This requires manual intervention on your part, but it should be done on an exception basis only.  So, if most of the time you only buy food at Cub Foods, but this one time you bought toiletries and did not use split transactions, don’t worry about it.  The important thing is that you have a high level understanding of your spending, and a few dollars here and there are not going to make a big difference.

The other challenge you may have to deal with is how to categorize your cash expenses.  My recommendation is that you minimize your use of cash, and create a repeating transaction every month that allocates your cash expenses to different categories.  So, for instance if you usually spend US$10 in cash a week on lunch expenses, and US$10 a week in cash on small miscellaneous expenses, then just create one repeating transaction at the end of every month, allocating US$40 (US$10 times 4 weeks per month) to the lunch category and US$40 to the miscellaneous category.  This does not need to be 100% accurate.  Again, you are trying to capture at a high level how much you are spending in each category.

If you have setup Quicken, and have started downloading your transactions and categorizing them automatically, you will find that keeping a daily measurement of your financial position is as easy as clicking a few buttons.  One of the things that Quicken will do for you is show you what your net worth is at any point in time.  This is a very important measure that you should use to gage how well you are doing financially (see the article “How Much are you Worth?”).

Another great advantage of using Quicken and downloading your transaction on a regular basis is that your accounts are always automatically reconciled.  So, for instance, when you receive a bank statement at the end of the month, you can press a reconciliation button in Quicken, and if you didn’t make any mistakes, like magic, the balance in Quicken will match the balance in your account statement to the penny.  Why is this important?  In this day and age, considering the threat of identity theft, you will want to know as soon as possible if someone else is using your account without your authorization.  If you keep Quicken updated, you will know within a few days if someone is charging your account for expenses you did not incur.  Then you can notify the proper authorities and stop the thief from doing any more damage.

In addition, Quicken offers a number of reports that you can easily run.  Do you want to know the annual return on your investment?  There is a report that will tell you that.  Do you want to know how you are doing against your budget?  There is another report that covers that.  Do you want to see a graphical representation of your net worth’s growth over the last few years?  There is a report for that too.

Even if you are not computer savvy, you can use Quicken to your benefit.  The program is intuitive and easy enough to use so that the average person can take advantage of most of its functionalities without much difficulty.  There is much more to Quicken than we have covered in this article, but even if you only use the few features mentioned here, you will be on your way to having a good grip on your personal finances.