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How to cast-iron your finances (easily)

UNLESS you are super-efficient, keeping a good budget is like a sleeping pill to most people. You know you should do it, but you never seem to get it done.

Don't feel too bad, there's a reason for it. Keeping tabs on all your income and expenses can be a lot of work.

If it already takes you a long time to balance your chequebook each month, imagine how much longer you would spend assessing each of your purchases.

If you are not averse to computers, there's plenty of banking and finance software that makes tracking expenses a lot easier than it used to be.

Before these came along, tracking expenses meant keeping all your receipts and then reconciling them every few days or so. You know how it is, once you get off the habit, it's hard to get back on track.

Now with software and even on-line websites, your computer can do much of the work for you.

However these programs are only as good as the information they receive. Few people have simplified their finances to the point that they use a credit or debit card for every purchase they make. Often, it's the small cash items you're tempted to dismiss that add up to a significant drain on your finances. Because those cash purchases don't show up on any bank or credit card statement, your budget software won't provide accurate reports - unless you enter those expenses manually.

Because a firm understanding of your income and expenses is the No. 1 step in forming a personal financial plan, it's best to have as much detailed information as possible. But if you've tried without success to track your expenses, here are a few tips that may help you on the road to financial self-knowledge.

Going all-cash

The simplest way to budget is to use cash for all your financial transactions. You can do this in several ways. One way is to cash your paychecks and then keep cash on hand - but having a large amount of cash around isn't the most secure way to handle things. Another way is to make regular withdrawals of cash that will last a few days to a week at a time.

You may find that no matter how hard you try, it's impossible to use only cash. Many banks require customers to make mortgage payments by automatic withdrawal from a bank account. Utilities and other companies that bill on a regular cycle have pushed customers to move to automatic billing because it saves time and expense for both the utility company and the customers. Although automatic deductions require some separate tracking, moving the bulk of your transactions to cash will still make clearer to you how you stand.

At the end of each month, look at how much cash you have left, if any. This will tell you whether your expenses match your income. Although this method doesn't give you detailed information about exactly where your money is going, it does catch all the small cash transactions that sometimes escape tracking programs.

The envelope method

A variant of the cash method, the envelope method involves a bit more planning. You cash your paycheck as in the cash method, but then divide the cash into categories.

For example, if you get paid RM3,000 a month, you might put RM800 representing your rent or house payment, RM500 for groceries and so on. You divide your money into as many categories as you want to track.

This method gives you more information about how you spend your money. If your grocery envelope has money at the end of the month but your eating-out envelope runs out early, then you know that you're not eating at home as much as you had planned. Also, depending on how many envelopes you have, the method can really point out areas that represent holes in your finances.

The hybrid method

These methods work even if you don't have any tracking software. However, in conjunction with such software, these methods can help close the information gap that software programs usually encounter.

For example, your software may tell you that you earn an average of RM500 per month more than you are spending on tracked categories. But a quick look shows that your checking account hasn't gone up by RM500 each month. It's likely that the difference is reflected in the cash transactions that you aren't picking up on the software. By using either the cash or envelope method for that RM500, you can get a more accurate picture of where that extra money is going, thereby giving you a more complete picture of your overall expenses.

Budgeting may seem like a large time commitment. Yet that investment of effort can provide huge returns in the form of cost savings and a reduction or elimination of unnecessary expenses. A good budget can help you identify how much money you have available to save and invest, as well as give you an idea of how much leeway you have if an emergency arises. With these simple methods, even the busiest people can find out how they stand.
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