What are the advantages of doing accounting on your personal finances?

Question

What are the advantages of keeping track of your personal finances? Is it only worthwhile if I earn "enough"? Why should I bother?

Answer 1

Hello,

This is a question I am often asked while tutoring students. The easy answer to this is that implementing a formalized accounting system on your personal finances is unnecessary. The reason being that accounting is a double-entry system that would require an individual to participate in quite some work to manage their personal expenses and income. The end goal of financial accounting is to prepare financial statements that gives decision makers the ability to make decisions on consistent and reliable information.

A much more efficient alternative when dealing with personal finances would be to create a personal budget. Estimate your monthly income along with fixed recurring expenses (rent, insurance, phone bill, etc). Once you've identified these fixed expenses, estimate the large variable expenses such as food and entertainment. If you take these expenses as a percent of total income, you will start to see which expenses can be reduced that will enable you to save money. For example, let's say you make $500 / week($2000 per month), pay $600 per month in rent, $100 per month on insurance, $30 per month on phone bills. As a percentage of income, these fixed expenses total to 37% of your monthly income. Which leaves you the ability to manipulate expenses associated with 63% of your income.

The example used is very simple and odds are you have more expenses to deal with. The best advice is to decrease unnecessary variable costs such as entertainment, eating out, etc. If you can put away even 4% of your income per paycheck every paycheck, you will be better off than if you didn't. I will end with this, it's easier to decrease expenses than to increase income. I hope this answered your question.

Answer 2

There are several advantages. It helps you to keep track of where your money is going. This allows you to make better choices regarding regarding investments, as well as other important financial decisions. You should begin by tracking your spending over a period of time, say for example one month or three months. Using this information, you can then develop a personal budget, calculating expenses that you need to budget for various categories, such as auto/travel expenses, household expenses, education, entertainment, etc. You should also include an emergency fund for unexpected expenses (e.g., car repairs). Your budget may also include any long-term goals, such as college or other items. Once you have the budget, you will need to follow it, tracking your actual spending against what your budget says you should be spending. This comparison should be done frequently enough, perhaps weekly or monthly so that you can quickly adjust your spending habits. The objective of accounting for your personal finances will increase the likelihood of achieving your financial goals.