When I was young I thought that money was the most important thing in life; now that I am old I know that it is. ~Oscar Wilde
We live in what is called an “information age”. There are few, if any, people left in this world who could not benefit from knowledge of how to use the information out there to improve their personal finances. That’s what this article is about – specifically, how accounting principles can help us with our personal finances.
Now wait…before yawning and clicking away to find articles on Britney Spears or American Idol…think about this. Chances are you are using accounting in your life already, and may not know it. Most people have at least some dealings with money at their workplace, and will take admirable care of the finances for their employer. Yet these same people do little or nothing with their own money. Anyone with money of their own could benefit from some basic knowledge of accounting principles, which are not that hard to learn. Know how to wield the tool to make the most of what you have.
In the old days a man who saved money was a miser; nowadays he’s a wonder. ~Author Unknown
That’s all accounting is…it’s a tool to identify what we have, where it goes, and figure out where we’d like it to go. It’s not about being huddled over a bank book or at the computer for hours. It’s about figuring out our goals and who we really are.
Let’s get started.
Accounting breaks down into three parts. The first part is identifying what we spend, and where, and how much. The second part is recording that spending in an organized, trackable way. The third part is communicating that information to others and analyzing what needs to change, if anything, about our spending patterns.
Anytime we spend money on something, from paying rent on your apartment to buying food to giving some change to a homeless person in the street, we are making what’s called a transaction. What transactions do you make? Do you know where your money goes?
In most cases, you probably do. Often we may not be fully aware of where all our money goes, and we get to the end of the month desperate for the next check coming from our employer, because all our money is gone. Once we can learn to identify where our money is spent, we can plug up any undesirable holes and direct our money to go where we want it to go.
The writing down of transactions in an organized fashion is what most people think of when they think of accounting…the bookkeeping part of it. This is also the part that tends to turn most people off doing it, because it’s somewhat tedious at times. Isn’t is scarier to NOT know where it’s going, however? There isn’t one way and only one way to record information. There is a system for that works for anyone, and the peace of mind that comes from knowing where your money is going is priceless.
The third aspect of accounting is communicating this financial information to other people. If you pay taxes each year, you’re already doing this. When you pay taxes to the IRS, you’re communicating your financial information to an external party. If you have a spouse or partner who has a stake in the money you make, you’re also doing this already, although your spouse or partner would be an internal decision-maker with you.
This third aspect of accounting is also for dreamers and doers, because it involves analysis and goal-setting. It’s where we examine the past transactions we’ve made, and think to ourselves: Is that really where that money was supposed to go? Could I have done better? Does something need to change?
Sometimes this phase is the hardest, because most people don’t know what they want, or how to use their money to get there. It may take time to determine what our goals really are, but any effort in that direction can pay off serious dividends to us.
Lack of money is the root of all evil. ~George Bernard Shaw
Once we become more aware of each transaction, and take steps to record it and analyze and communicate your results when necessary, we are well on the way to taking control of our money and not letting it control us.