I plurked in early January that I finished my initial draft of my personal 2009 budget. I mentioned then that I only increased my projection by 1% compared to last year’s budget due to, yes, the worldwide economic crisis. Based on the comments to that plurk, I thought it would be interesting to do a series of posts explaining how I manage my money such that I am actually able to do a year-long budget.

I’m providing my methods for educational purposes. They works fairly well for me and it goes without saying that they may not necessarily work for you. You should simply read this series as a way of looking at what I do and then adapt a process for your own self should you wish to get a hand on your finances as well.

Record your expenses

For me, the most important thing in managing my money is having a scrupulous account of my expenses. The thing is, how can I create a budget if I have no idea where my money has been spent, right? This is why I’ll start this blog post series by laying out my process for recording my expenses. I keep track of them by using a simple spreadsheet file—none of that fancy-schmancy professional stuff like QuickBooks. After all, this is just my personal finances and not a business.

My main worksheet in that file is what I call the cash-on-hand accounting. This is where I record every inflow and outflow of cash to and from my wallet, i.e., the cash on hand, and I have one such worksheet per calendar year. Let’s call this inflow or outflow of cash as “transactions”. The worksheet also serves a dual purpose of being a complete record of all of my expenses and from which I can extract data for later analysis. Shown below is a sample of my worksheet with completely fictitious data. Hehehe.

The columns in the worksheet are as follows:

• Date. This is the day of the week and the date when the transaction was made. By default, the cells contains a formula that copies the value in the cell above. So when there’s a new date, I override the formula with an actual date value. I have some fancy conditional formatting that makes the contents of the cells having the same value as the cell above them invisible. This gives the records in a single date a visual grouping without having to merge cells.

• Item. A short description of the transaction.

• Category. The category of the transaction. I have a fixed but flexible set of values that I use and this includes items like “Food”, “Transpo”, “Gasoline”, “Movie”, “Bank”, “Gym”, “Clothes”, and “Miscellaneous”. I capture this information as soon as I record the transactions and it facilitates instant analysis such as knowing how much I spent on food last January.

The exact meaning of the values I keep in my mind, but for instance, “Food” just pertains to food I personally consume; if I give a blowout, that expense goes into a different category. The list of values is also flexible. For instance, last year I decided to split off “Gasoline” from “Transpo” (which includes public transpo fares, toll fees, and parking fees; but not car loan/repair expenses) because gasoline prices had become volatile, skewing the whole “Transpo” category.

• Amount. This is the actual amount of the transaction. Negative (red) values imply outflow or expenses while positive (black) values are inflow, such as ATM withdrawals, cash gifts during Christmas, or loans return to me in the form of cash.

• On-hand. This is the expected amount of cash that I should have in my wallet. This is basically a formula that adds the transaction value of the cell to the left to the cell above.

• Remarks. I add here any other additional remarks as needed, but usually I just record here the actual amount of cash in my wallet whenever I do my “wallet auditing” for pegging purposes since the “On-hand” column is purely formula-based.

I’ve been using this worksheet format, more or less, since 2002. I started recording my expenses back in 2000 or so in college but I used a simpler log format then and I only recorded major expenses—no Ikot or Toki jeep fares or meals. The current format works well for me and you can probably adapt a similar one for your particular needs.

Capturing the information

I don’t record the transactions as soon as they happen since I don’t have my spreadsheet file with me all the time (it’s in my main computer at home with backups spread all around). I also don’t record them everyday but instead do my “wallet auditing” at least twice a week, normally on Monday and Thursday nights.

So, until I get a chance to do the audit, I store them in the form of receipts that I keep in my wallet. I reserve a special pocket in my wallet where I store the folded receipts in chronological order. For those transactions that have no receipts (e.g., the ATM runs out paper, taxi rides, etc.) I record the information to a draft SMS in my cellphone.

Because of this, I always demand a receipt whenever I buy something, not because I support proper tax collection by the BIR, but mainly for my personal accounting. In addition, once I record the receipts into the spreadsheet file, I archive them in monthly envelopes on the off-chance that I lose my file and need to recreate the transactions since the last backup.

That said, I have to say that I don’t keep the toll fare receipts anymore. I used to do that but the volume and bulk of the receipts is too much for my wallet and monthly archives. This is basically just one of my many quirky exceptions to my personal accounting practices that you should not adapt unless it makes sense for you too.

Some considerations

• There are times when after recording all of my transactions, the expected cash-on-hand does not match the actual cash in my wallet. I often get frustrated at this and if after an hour or so (because I won’t feel at ease, hehe) and I still don’t know where the expense went, I’d give up and then record the discrepancy as a separate transaction categorized under “Unknown”. I then strive to keep the Unknown total to be much less than 1% of my overall expenses. For instance, my total unaccounted expenses totaled to around 660 pesos in 2008. These unknown expenses can be mitigated somewhat by performing the cash-on-hand auditing much more frequently.

• My friends usually seem surprised that I remember repaying the money they loaned to me. (I’ve noticed that some people have a tendency to forget that I owe them money. ) Well, it’s simply because I also record the IOUs into my file and filed under the category “Loan”. At the end of the year, the total for the Loan category should be zero, which should (but not necessarily) mean that I’ve repaid everything and vice versa.

• I was sent to Japan by my company a couple of times and during those trips, I suspended my peso record keeping and instead adapted a separate and simpler sheet to keep track of my yen travel allowance expenses.

• Credit card purchases complicate matters a bit. I have an extension card from my sister’s credit account and we diligently pay the accrued expenses every month. For my purposes, I only record the credit card expenses on the day that I pay the credit card balance and not on the day when I used the credit card.

Note that this is not an ideal setup especially if you really want to keep tabs on when you use your credit card and for what kind of purchases. A better way could be to record the credit purchase as a “Loan from CCC” (CCC = credit card company) transaction followed by the actual expense, then have a “Loan from CCC returned” entry later when the credit balance is paid. But since I rarely use my credit card and we pay every month, this is not such a big concern for me.

• For my BPI EPS purchases (i.e, point-of-sale purchases wherein I use my BPI ATM card as sort of debit card), I record two transactions: a “virtual” bank withdrawal simply labeled “EPS” followed by the actual transaction.

The cash-on-hand worksheet is the most important sheet in my “accounting arsenal” but I do have other sheets that tackle different aspects of my financial status. I’ll be discussing these in future blog posts. Stay tuned!