Episode #20: The Easy 7 Step Process To Manage Your Finances Every Month
How does thinking about your personal finances make you feel? Stress-y, and chaotic? Like you’d rather go have a full Brazilian than be asked to share your personal finance details with a close friend or family member? Or, are you relaxed, in control, and positive that you’ve got all your bills paid for the month, won’t be paying any accidental interest, and confident that you’re saving for your future and some of your bigger financial goals like retiring on a boat in the Caribbean? The difference between getting the nervous sweats every time you open your credit card statement, and feeling organized and in control is simply reviewing your finances once a month. This is a simple, monthly chore that we should all be taught how to do at some point in our young lives.
If you’re not already practicing a version of this, it may sound daunting, but it’ll become a habit in the long run that helps keep you feeling calm and in charge of your finances. I started doing this as soon as I started earning money regularly, like as a real live adult, and it’s been an absolute game changer in my life. It’s helped me with goals like making savings, buying a house, living comfortably and being able to spend money without all the guilt through my 20’s. Everybody should be doing some version of this on a monthly basis, and today I’m going to walk you through an easy to follow, 7 step process to reviewing your finances once a month.
Before I dive in though I want to emphasize that the key to doing this well and seeing results is to make it a habit. Decide right now, based on your schedule, when you’re going to review your finances each month, and schedule it in. Block off that time on your calendar and make sure that it happens. I choose to do this on the first of the month, every month. This process should take you somewhere around 1-2 hours, so make sure you block off enough time to finish the task. What you’ll need is access to your online banking, your credit card statements, and a spreadsheet set up to record your expenses each month. I just use a simple list format in microsoft excel to record my expenses, along with the date, category, what the expense was, and the cost. It’s good to keep it simple.
1. Make sure you’ve deposited all your payments from the past month.
If you’re an employee this step is probably really easy, and just means going back and checking that your payments went through properly. If you’re self employed it’s a bit more complex, but that has more to do with your individual accounting system. The goal here is just to cast your eye over it, make sure everything’s in order, and that there are no mistakes or errors. Even with automated systems, mistakes do happen, and you’re never going to catch them if you never look at your accounts.
2. Pay your necessary expenses.
Many finance experts will tell you to ‘pay yourself first’ which means put money into savings first, but unless you know you have extra disposable income at the moment, I believe it’s more important to make sure you’ve paid your life expenses first. This means paying your rent, your utility bills, making sure mortgage payments went through properly, your student loan payments. Work down your list of fixed costs, and make sure that everything important is paid, so you don’t end up accidentally paying interest, or late fees, or just embarrassingly forgetting to pay someone. I find it’s helpful to make a list of all the expenses that need to be paid, and then use this list as a reference to check things off and make sure I don’t forget anything when I’m going through this step of the process.
3. Record all of your expenses from the past month.
This step can either be complicated, or quick and easy, and it’s up to you to spend money in a way that makes this part of the process easier. For example, if you allow yourself to spend money with your debit card, and e-transfer, and paypal, and credit cards, it’s going to get really complicated to track your expenses. Personally, I pay absolutely everything I possibly can with a credit card, with the exception of a few payments like some utilities bills that don’t accept credit cards. If up until now your spending system has been disorganized, work on starting to use your credit card for everything, and go easy on yourself with this step for the first month while you make the change. I recommend using a one or two credit card system, like I talked about in episode #14: Credit Cards for Beginners, but really this is up to you. I’m going to assume you’re using a credit card though for this exercise.
So, go ahead, print out your credit card statements, and start to systematically go down the list and record every expense you made in an excel spreadsheet. I keep this really easy by recording the date, what the expense was, the category it falls into like groceries or car, as well as how much it cost. Once you’ve completed this list a few months in a row, you’ll start to get a better idea of your spending categories and how you want to label them.
When you’re recording all of your expenses, you should be keeping an eye out for errors in your statement, maybe being charged twice for something, or overcharged for something. Mistakes like this do happen, and if you’re never brave enough to look at your credit card statement there’s no hope that you’re ever going to catch these mistakes and they’ll cost you money. It’s also a great way to stay on top of recurring charges like subscription fees, so you never fall into the trap of just forgetting about a subscription and just continuing to pay it. Finally it will help you get a better idea of your spending habits. It’s important to understand things like how much you spend on groceries, or how much you spend getting your morning coffee. For example, you may discover that in your brain you’re just getting a morning coffee, but in reality you’re also spending an extra $4 on a croissant half the time, that actually makes it a much more expensive habit. Don’t be hard on yourself when you do this, don’t judge yourself or beat yourself up, just start to get an understanding of your spending habits, because from there you can decide to be in control of them.
4. Pay off your credit card in full.
I’m going to say it again, pay off your freaking credit card in full! Barring an emergency that you had to put on your credit card (I’m not going to be black and white and pretend this will never happen to anyone) you want to pay off your card in full every month, none of this minimum balance or partial balance BS. If you’re not entirely sure how your credit card works, or if you just need a little credit card refresher, I recommend tuning in to episode #14: Understanding Your Credit Card after this. This is an important step in the process because if you just ‘forget’ to pay it on time as many people are likely to do, it’s going to cost you so much money in interest, which is really the biggest possible waste of money ever. Literally it’s paying money to be forgetful or lazy. I’ve done it accidentally in the past twoo, and honestly I’m still frustrated by it. Don’t forget, start using this monthly finance system if only so that you don’t forget to pay your card.
5. Add up your expenses in categories.
Look back over the expenses spreadsheet you just made, and add up all the different categories you spent money on that month. This will look different for everyone, but examples of categories are rent, groceries, vehicle, entertainment, eating out, personal care, and shopping. These categories can change and adapt over time, and are really helpful to get an overview of how and where your money is going. For example, that $5 latte at work each day is hard to keep track of when it just appears as a little blip in your spreadsheet, but add them all up under a coffee budget, and you’ll be able to see that you spent $150.00 on takeout coffee that month. Again, no judgement from me, but having that knowledge gives you the power to be in control of your own spending habits, and consciously choose if that’s a $150.00 habit you want to keep.
6. Transfer money to the other accounts you keep.
If this is a new concept to you I recommend listening to episode #19: What to do with every paycheque you receive. To give you a quick overview though, I recommend you have accounts for your emergency savings fund, different retirement savings accounts, and a larger savings goal accounts. When you’re really organized, you’ll be able to set up automatic transfers into these different accounts, but you still want to make it part of your process to look through this, make sure those transfers happened properly, and review the status of those accounts to make sure everything is on track. If you don’t have an emergency savings fund yet you have to go listen to episode #6: How to start an emergency savings fund and episode #16: 10 Ways to save money faster to fill your emergency fund. Also, if you’re thinking ‘pffft I don’t need a retirement savings account’, keep your eyes peeled for some upcoming episodes my friend, because I beg to differ. When you do have those accounts set up though, step 6 is to make sure that your transfers are happening properly and on schedule. Whether you’re doing them manually still, or have them automated.
7. Reward Yourself!
Seriously, step 7 is to reward yourself for being done! No one likes doing this chore honestly, and there will be so many other things pulling at your attention during the time you’ve set aside to do this, BUT this is the single most important chore for you to do each month, so make sure you plan a reward. Flexing your diligence muscle and setting aside the time to get it done will make the rest of your life feel so much better knowing that your bills are paid, you’re paying yourself and your future financial goals, you’re not going to be charged any late fees, and you’re in charge of your own spending habits. So when you’re done this, you definitely deserve a reward! Make it your own little monthly finance party. I usually do mine during the work day, because it’s also one of my business tasks, so when I’m done I take a long relaxing break instead of just diving into the next task. I go for a hike, a fun workout class, for a walk with a friend, a stroll to a coffee shop with a book, etc. Make sure you actively plan time for your reward into your schedule on finance day. This will make it way easier to get the task done, and way easier to not get distracted scrolling instagram while your credit card statements print, making everything take so much longer. Reward yourself, you’ve done a good job and are miles ahead of so many other people just because you simply looked at your financial statements.
Now, maybe you’re feeling fired up and ready to start doing this next time the first of the month rolls around, or maybe you’re still feeling a little unsure about where to start. If you’re still a bit nervous I have another lesson you should sign up for first. The how to adult school is currently offering a free mini course on personal finance. It takes place over 7 days, and is all about the beginner basics of personal finance, like the abc’s of getting your money under control. I highly recommend you go sign up for that free mini course, and take your time getting better acquainted with your finances.
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