Personal Financial Management Using Free Tools - Part I

Have the financial gurus scared you out of managing your money? Is it because they want you to pay them to manage your money for you? You can manage your own finances. Just follow these 3 steps in this 3-part series:

1. Where are you now? Track your spending -- everything for a year. Put it all in a summary; I'll show you how. If you are like most people you are living paycheck to paycheck and have no idea where your money is going.

2. Where do you want to be? How much do you need to have set aside in 5, 10, 25 years, or when you retire? You need to consider life expectancy, inflation, rate of return, and yearly living costs during retirement. Just follow my hypothetical example using free software.

3. How will you get there? How much do you need to save each year in order to accumulate the total necessary? Consider the number of working years left until retirement, inflation, and your expected rate of return.

You won't need to buy any personal finance software or special Excel solutions. I use a free application called OpenOffice Calc; it's a little slower than Excel, but it can do just about everything that Excel can -- and did I mention that it's free? Just search "OpenOffice" and get your free download.

Let's get started. How are you at record-keeping? If you have your checkbook, bank statements, and credit card statements available, you can go through them month by month for the past year and fill in the table below. If, like most people, you have not held on to your records then just fill in the table for each month going forward.

This exercise is very important because:

It will help you answer the critical first question: "Where are you now?"

You will get a bird's eye view of your finances over an extended period.

You will be able to compare yourself with the average.

You will be able to spot where your money is leaking.

Create a table with the following:

Expense JAN FEB MAR ... DEC TOTAL TOTAL% AVG%

Gross income (Average 100%)

Income taxes (Average 22%)

Shelter (Average 19%)

Transportation (Average 13%)

Food (Average 11%)

Recreation (Average 6%)

Household (Average 8%)

Clothing (Average 4%)

Gifts (Average 3%

Other (Average 14%)

This is a simple 10 line spreadsheet to get you started. You may want to expand on it as you go and break the broad categories down. E.g. "Shelter" can be broken down into: Rent/Mortgage, Utilities, Property taxes, Repair/Maintenance, etc. The last category "Other" deserves special attention. Since this category includes, on average, 14% of our expenses, you will definitely want to break this down into line items which make sense to you and provide useful information to you. Some possibilities: health, personal, tobacco, alcohol, lotto tickets, education, books/magazines, etc. Remember, your goal is to find out where your money is going, summarize, and compare your situation with the average.