Once upon a time I used to balance my account with that little book they give you when you get a book of cheques. Eventually, I stopped doing that. It was too much hassle. I was pretty good at keeping track of my money with my head. As time went on, my money situation got more complicated. I got a job, which meant I had income. With great income comes great expenses.
Then, within the space of about a month, I wrote three rubber cheques. When I wrote those three cheques things got a little jumbled in my head. The cheques were cashed earlier than I thought they would be. This resulted in a $35 NSF charge for each cheque. One of the cheques was a rent cheque. The apartment company charged me for the inconvenience of the bounced cheque. I ended up spending about $100 in NSF charges. Not cool.
I decided it was time to keep closer track of my banking transactions. I knew that recording my transactions in that little book that comes with your cheque book wouldn't be enough. I tried that already, and eventually gave up. Instead, I bought Accounting For Dummies. Then I enrolled in an Intro to Accounting course at the local university. I started using GnuCash, an open source accounting program.
That was smart because it helped me to understand all the accounting concepts and lingo. Now I meticulously keep track of my money. I know where my money goes. I close my accounts at the end of every year. I can go back and see where I spent my money in an given year. I can see how much I spent on entertainment, rent, gas, etc. in a given year. I can see when money will be transfered from one account to another. I haven't bounced one cheque since I started doing this.
Just over a year ago, as long time readers will remember, I bought a car. This was the deal: $0 down, 0% financing.
Sounds like a good deal, right? Well, yes and no. If you have money to put down on the loan, it's only smart to not put it down if you're going to invest that money. Otherwise you should put it down. I did have a bit of money (that I haven't invested) that I didn't put towards the loan. I should have.
When you put $0 down on a loan, it makes your monthly payments rather high. I had just gotten my government job, so I was thinking "Hey! I'm rich! I can afford this!" But it turned out to chew up most of my disposable income. When that loan gets paid off, I'm going to feel like I won the lottery!
My problem was that, for all my knowledge of how much I was spending where, and how much money I was making, my picture of my finances wasn't exactly what I needed to determine what I should have done regarding the car loan. I had a great record of all of my financial transactions. But I had no general picture of my regular monthly income/expenses. So I recently fixed that.
I set up a simple spreadsheet where I list all of my monthly expenses and income, and calculate my monthly disposable income.
In the first column (A) I list predictable, consistent monthly expenses: rent, car payments, etc. No one-time expenses: TVs, stereos, computer equipment, etc.
In the second column (B) I put my predictable, consistent monthly take-home pay. No tax returns, bonuses, or insurance reimbursements.
In the third column I calculate my disposable income. Income minus expenses (Column B - Column A). It allows me to know how long a one time expense will take to pay off. It allows me to know if I can afford another monthly expense.
If I had been doing that before my car loan negotiations, I could have said "Ouch! That's too much! How much money do I have to put down to get my monthly payments down to $x/month?"
To summarize:
- Take an accounting or book-keeping course at a local university or college and apply what you've learned. This might be harder for those among you who aren't used to employing overkill methods to solve your problems.
- Set up a quick'n'dirty spreadsheet to track your basic monthly income, expenses, and disposable income. This might be harder for those among you without predictable income or expenses, like if you run a business, or have kids.
You're welcome.
