Take food, for example. Recently, I openly discussed my food budget for a month, which was about $770. This was pretty close to being in line with the cost of a moderate meal plan as defined by the USDA.

In order to reach that dollar amount, I spent more in some areas on average – such as on free range chickens, organic milk, cheeses (such as gruyere), wine, saffron, and so forth – and less in others, such as often buying only flour and making my own bread and breadsticks and rarely eating out.

This has interesting ramifications all over our budget. Because we eat a healthy diet, we’ve had very low health care costs over the last year. I’ve had one severe cold in the last two years, and my wife hasn’t had any. This has meant our expenses on things like cold medicines, doctor’s visits, and prescriptions has been really low. It has also reduced our entertainment expenses – we have more fun in the kitchen as a family, putting toppings on a homemade pizza or making a frittata, than we do going out to a movie or to Chuck E. Cheese or the like.

Our food choices also tie into our personal beliefs – we are pretty strong believers in eating well-rounded, highly nutritious, and diverse food, and getting our children to eat the same. This goes way beyond feeding them what’s easiest, what’s cheapest, or what’s strictly the healthiest – it’s about feeding them a diverse diet that teaches them to like unusual things and get a wide variety of micronutrients without lots of additives.

In short, every person and every family is different. We have different lives with different values and different beliefs.

Let me give you three more examples to clarify what I’m saying.

I’m friends with several members of the Church of Jesus Christ of Latter-day Saints. Members of this church are expected to tithe ten percent of their income directly to the church, no questions asked. This drastically alters their budget, especially in comparison to secular folks or members of other churches who do not enforce such a strict level of tithing. Right off the bat, comparing the budget of an LDS family bringing in $50,000 a year to the budget of a secular family bringing in $50,000 a year is an unequal comparison.

Demographically, we’re almost identical to our neighbors to the north. We’re a married couple living in rural Iowa with two young children, and our income level from employment activities appears to be pretty close to the same, so you’d expect us to have fairly similar budgets. Not so. They own three vehicles, all of which are newer than either of our vehicles, and two of them are 2006 or later. They place significantly more value in the quality level of their automobiles than we do. They also travel by car more, with almost-routine long driving trips across several states. End result? The “automotive” part of their budget is obviously much higher than ours. What percentage is lower? I don’t know, but that extra spending has to be balanced out in some other aspect of their life.

Alternately, you can look at a completely different situation. I know two people living in a small home on a retirement pension that, along with Social Security, provides more than enough for them to make it. However, one of them has a two-pack-a-day smoking habit and between them and their guests, roughly a twelve pack of beer gets consumed a day at their home. Their “vice” budget in this case is tremendously high, causing the other elements of their budget to face the squeeze.

Not only do families with different demographics and different choices have different budgets, but budget proportions change for everyone when things like energy outpace inflation. Compared to five years ago, almost all of us are spending a significantly larger slice of our pie on gasoline, so using a ready-made budget from 2003 won’t really work, either.

The real solution is to start with what YOU spend. Keep track of your real, honest spending for a month or two, then use that as a basis to figure out where you can trim some spending by making different choices. The routes you take to frugality might be different than someone else – you might trim your food expenses by eating very basic meals at home, while others might choose to save money by setting up a carpool with their friends.

Don’t use someone else’s spending as a model for your own. Just because someone else spends more than you do in an area doesn’t mean it’s somehow okay for you to let all restraint go and bust out the plastic. It merely means they’re making different choices than you and those different choices come from different beliefs, different circumstances, and different goals – three things a budget comparison really can’t show you.

What I eventually found is that an optimized wallet helps with personal finance recovery and with remembering seldom-used but key pieces of information. When I moved from using the wallet as a catch-all to using it as a tool, I began to realize that it could save me a lot of time and money compared to the way I used to do things. Here are six of the tactics I used.

Junk all but at most two of your credit cards.
This is the most important thing you can do, especially if you have a constant temptation to bust out the plastic more often than you should. First thing first: find a good general use credit card. Just one, and I can guarantee you it’s not the credit card you got at the checkout counter during your last giant shopping binge. Once you’ve identified that “best card,” take every other credit card in your wallet and chuck ‘em. Put them in a safe place that’s not in your wallet. Eliminate the balances on all of those extra cards, then eventually cancel them.

This tactic works well because you don’t have a lot of choices. You can’t look at eight cards in your wallet, think “This one doesn’t have a balance on it… I’ll use it!” and spend away – you have to face that one card and know that you’re putting a larger balance on it. Plus, if you’ve chosen the card well, you’ll be racking up some decent rewards with it.

Wrap a picture of your goal or inspiration around your credit card.
Still not convinced of your own willpower? Take that one credit card and wrap a picture of your personal finance goal or your inspiration around it. Wrap that picture around your card and tape one edge of that picture to the other picture, creating a pocket or a sleeve for the card to live in. Then, when you feel the urge to pull out that card, you’ll pull out that picture, too, and it will serve as an immediate reminder of the big dreams you’re postponing to make this little trivial purchase.

I personally used a picture of my son in this way for most of a year until I broke my bad credit card habits, because he was the inspiration for my turnaround. Whenever I pulled out my credit card, I’d see his face, and I couldn’t help but reconsider my purchase.

Use it for password storage.
For some people, this seems crazy, but it really works. I keep a half-sheet of paper in my wallet, folded up a few times, that keeps some of my passwords on it. I don’t keep ones that I use regularly enough to remember them, just the ones that I don’t use very often. I also don’t directly indicate which site each username/password is for – just something that reminds me what they’re for – a precaution against a stolen wallet.

Edit: Some people jumped on this as being a bad idea. However, Bruce Schneier, an expert on security issues if there ever was one, agrees with this approach wholeheartedly.

Merge some of your rewards cards.
I’m a big fan of maximizing customer loyalty programs to get free stuff, but one drawback of that is that you end up accumulating a bunch of cards in your wallet. No more. You can merge several cards onto one by using JustOneClubCard.com, which allows you to create a single card with the bar codes from up to eight programs. I have one of these and it eliminates the space for seven cards in my wallet – and makes it so that I don’t have to hunt for a particular card at the checkout.

Process your wallet once a week or once a month.
I find my wallet is the place to collect receipts and other small financial detritus. While it’s efficient as a junk collector, it doesn’t take long for that wallet to get nice and fat with garbage. Thus, once a week, I process what’s in my wallet, getting rid of all of the unnecessary receipts and other little documents that I pick up. If I need to do anything with these pieces, I just take care of it right then so that I don’t have to worry about it. This keeps my wallet thin and keeps me from embarrassing myself with a monstrous wallet full of garbage.

A corollary to this: if you find yourself actually in a routine of processing your wallet, it becomes a very convenient place to put stuff that you know you’ll need to look at again soon – almost like a mini-inbox in your pocket.

The next time you buy a wallet, don’t buy a cheap one.
I have owned four wallets in my life. The last one has lasted longer than the other three combined, but it cost double the price of the others right out of the chute. What does that mean? Don’t hesitate to spend more on a quality wallet that will last for years, even if there are cheaper options available. You’ll end up paying less per year with a really good wallet than with a cheap vinyl one, thus saving yourself a bit of money and a bit of time, too.

So why do I use lists so much? They provide a lot of benefits in my life.

First, they save me time. Rather than standing around and wondering what I need to do next, I just grab the list and do the next item on it. I don’t worry about whether or not I need to clean the windows or change the furnace filter, I just check the list. That way, I can save my actual thinking for other things.

Second, they save me money. Making shopping lists keeps me on focus in the store and minimizes the unnecessary purchases that I might make. If I trust in that list and know that it tells me everything I need, it becomes much easier to buy only the stuff on the list and keep everything else out of the shopping cart.

Third, they help me organize my thoughts and ideas and plans. I constantly make lists to organize all of the thoughts floating around in my head, transforming them from idle thoughts into organized structures that I can move forward on. Rather than just thinking idly about something I’d like to do, I lay out the details in the form of a list, put them in a reasonable order, and then look at what I can do to get the first item done, much like my 101 goals in 1001 days list. I do the same thing when making a decision – I list the pros and cons and use them to help me make up my mind, as I did a while back when thinking about becoming a stay at home dad.

Needless to say, I’m addicted to lists, but it wasn’t always that way. It took a lot of effort to effectively integrate lists into my life. Here’s how I did it.

First, I made the tools for making a list incredibly handy in my life. Not only did I start carrying a notebook and pen in my pocket everywhere, I started keeping a notepad and pen on the fridge to write down a grocery list, a giant whiteboard to jot down household tasks, and so on.

Next, I started putting effort into piecing out complex plans on paper. Rather than just sitting around mulling things over, I just started jotting down each thought as it floated into my head. I usually don’t use any sort of order at first – I just let the ideas flow, then spend time organizing them later. This works incredibly well for me. Lately, I’ve been using Microsoft OneNote (when at my own computer) and Google Notebook (when on the road) for this task, as it’s easy to write down little pieces of information and then easily move them around, edit them, and organize them how I want.

Then, I started creating lists of things to do routinely. For example, I have a list of tasks I want to accomplish each day, from brushing my teeth and shaving to reading three books to my son. I found that Sciral Consistency works very well for this. Sciral Consistency lets you make very easy checklists of tasks you want to complete every day or every few days, like watering the plants every three to five days, etc.

At this point, I naturally began to deeply trust my lists, and I began to practice what amounted to Getting Things Done.

Just try it! Try keeping a list in your pocket and use it to write down anything that you’ll need to remember later, and then look it over daily. Also, try getting a notepad with a magnetic backing and put it on your fridge – and tie a pen to it so you can write things down without hesitation. Those two things will start you down the path of using lists in your life – and you’ll come to find that they’re incredibly efficient time and money savers.

It turns out that there really is a point in doing it this way and using both is not at all confusing, as the two accounts serve very different but complementary purposes. Here’s the scoop.

About a year ago, I was very disappointed with my checking account at a major bank chain. They were constantly finding new and creative fees to ding my account with and I was getting sick of it, so I decided to seek out a new checking account, which I wrote about in the past.

During that process, I made a list of checking account features that I was really looking for:
+ no fees, period
+ some percentage return on my account balance, the higher the better
+ a nationwide fee-free ATM network
+ free online bill pay
+ the ability to write paper checks
+ the ability to easily visit a teller whenever I wanted
+ the ability to have 24/7 phone-based customer service

I quickly realized that in order to get some of these options, I was going to have to use a large, international bank. Thus, I started looking at the interest checking accounts offered by some large banks and quickly came across ING’s Electric Orange checking, which at the time offered a 4% APY on your checking account balance. This account hit home runs in four areas:
+ it had no fees, period – not even overdraft fees (they allowed you to essentially “borrow” the money to pay bills, then pay that back with interest, which usually just added up to pennies)
+ a 4% annual return on my balance, calculated daily and compounded monthly
+ a free online bill pay service and online account access
+ a fee-free nationwide ATM network
+ a 24/7 phone-based customer service

However, the account was missing two key features for me: you cannot write paper checks and there are no tellers you can visit to conduct business like cashing checks and so on. This frustrated me at first, but I decided to make the move to Electric Orange anyway.

Shortly thereafter, I closed up my account at the large mega-bank and then opened a checking account at my local bank in town. It turned out that my local bank offered the services I was looking for: a free checking account with online access and a branch not far from my home to do business with a teller if I so wished.

So now I have two checking accounts I use regularly. I keep most of my balance in the one that pays interest, from which I do online bill pay and most of my other transactions. However, that local checking account allows me to have a checkbook for free and gives me teller access, so I keep a few hundred dollars in there at all times and just use it for writing paper checks and any services that a teller might be useful for.

This system works incredibly well for me. Since there is no account at any bank that provides all of the services I’m looking for, I found that using two banks in this capacity works extremely well to provide all the services I need.

Many people (myself included, until pretty recently) have a box of “important papers” where they toss things that they know could be vital someday but they often don’t recall what is exactly in there. I used to keep mine in a small safe; my parents keep theirs in a safety deposit box.

Try spending some time to simply go through all of these important papers so that you understand what exactly is there and why it’s there. This serves a lot of purposes.

First, you may discover things that are out of date that you need to update. Things like passports often get tossed in these important papers and forgotten about until they’re desperately needed – and then it may be too late to get them updated for when you need them (or else it’s very expensive). I had a friend pull out a passport a day before an international trip only to realize that the passport was out of date – not good.

Another important document that may need updating is a will and/or revocable living trust, documents you should look into and create if you have a significant other or any descendents.

You may find an old life insurance policy that you’ve been paying on but not thinking about for years – do you really need it? Should it be updated? Does it have cash value that should be cashed in?

Second, you may discover items that could be better used elsewhere. For example, when I recently went through some old papers, I discovered a small number of savings bonds that I immediately cashed in and used to help with student loan debt repayment; I also found several vintage baseball cards that have some significant value but that I won’t be cashing in. In short, this one hour not only helped me find some things that I really needed to get done, but it also ended up with me having some additional cash that I didn’t have before.

Third, some effort in organizing these papers may make it easier to find things – and thus make this pile of “important papers” more useful. I found that taking these essential papers and organizing them was an essential first step in getting all of my financial papers organized, and doing that helped me to get a much clearer picture of my current financial state than I had before. Here’s how to get started with your own filing system if that’s of interest to you.

Going through the “important papers” box might only take an hour, but it might unearth some financial rewards and will definitely produce some additional peace of mind.

Not really understanding why it was so important or what exactly balancing a checkbook means, I asked her how she does her checkbook. She showed me a nice neat ledger of each deposit and withdrawal from the account that she keeps in the back of her checkbook that reflects what she calls the “real balance” of the checkbook. Then, whenever a statement comes in from the bank, she compares that list of checks and deposits with her own to make sure that the bank’s records match her own.

I realized pretty quickly that I do basically the same thing, just with online accounts and receipts. Here’s how I effectively “balance the checkbook” each Sunday when I do my weekly financial review (where I also calculate my net worth).

Throughout the week before, I save every single credit card (and check card) receipt in my wallet. These serve as a reminder of what I’ve spent over the last few days. I usually jot down what it was on the receipt if it’s not clear.

On most Sundays, I take that pile of receipts and itemize them in Excel. I usually like to keep track of my spending in various categories so I know what areas I’m doing well in and also doing poorly in. So, for example, a receipt from the gas station goes in the pile for automobile expenses and so on.

I also check the balances of each of my credit cards and my checking accounts. I look through the new things posted to the accounts in the last week and make sure I understand what they all are – and also make sure that anything I’ve spent has posted to the account. I usually then go ahead and pay off the credit card balances immediately using online bill pay. I then get rid of all receipts that have posted to the account and have no chance for tax write-offs via the paper shredder. This usually leaves one or two receipts that I leave on my desk to check next week.

On the rare occasion that I write a check, I use the carbon copy of the check as a receipt and do the same things as I describe above. I also know, by using my online account balance and subtracting any outstanding receipts and any automatic bill payments that will happen in the next week, how much cash I have on hand.

This little procedure, which takes about ten minutes, does a fantastic job of ensuring that I don’t ever come close to overdrafting my checking account. It also helps me to process my receipts, something which used to be a big problem for me. It has the same effect as the old-school checkbook balancing without the huge time consumption of managing one of those old-fashioned ledgers in the back of the checkbook.

Of course, the older system does work – my mother claims to have never had an overdraft in thirty years using her system. That’s a pretty good track record of success, I’d say. I simply prefer my system because it has the same effect and works better with my lifestyle.

Here’s what I keep tucked away and why:

Four $20 bills This is enough to cover almost every cash-based emergency that I can think of, such as paying a tow truck.

Four $5 bills and five $1 bills I keep these for tipping purposes, for dining and drink service, for example. If I know I’m going to be traveling, I up this amount quite a bit.

Other than this, I essentially don’t carry cash any more – my regular purchases all happen on a pair of rewards cards (between the two, I get between 3% and 6% cash back).

The question really comes down to risk: is this more cash than I should be carrying at any given moment? Given the benefits of having the cash when I need it, it’s a risk that I’m willing to take – the odds of a robbery in the area where I live are so low that it’s almost a non-factor.

In fact, the biggest risk of having this cash on hand is a temptation to use it. I sometimes think of it when I see a frivolous purchase and I attempt to justify using that cash for things I don’t really need.

To solve that, I generally tuck this cash into a pair of tiny pockets in my wallet so that they’re hidden from regular view. Then, when I actually need the cash, I am reminded of it, but during most normal activities, it never comes into my mind.

What’s your “cash on hand” policy?

Over the last two years, as I’ve gotten more and more used to online bill pay, my bill paying cycle has become largely automated, with only the variable amount bills (mostly utilities and cell phone) actually requiring extra attention.

Once a week, though, I do go through something of a “bill paying” routine. Here’s what I do.

First, on Monday through Saturday, I collect all bills and statements on a pile on my desk. I check the mail, look at anything particularly interesting, and flip the rest onto a stack on my desk. I do the same thing with receipts from purchases that could possibly be tax-deductible. The rest of the routine takes place on Sunday afternoon and eats a half an hour or so.

I check the account balances of all of my accounts. This is just to make sure that there are no surprise charges or anything like that. I usually record the balance of all of these accounts in Excel because I keep pretty tight tabs on my net worth (yes, I update it all weekly and have an awesome little graph of the last year or so, moving steadily upwards with bumps and valleys here and there).

I sort what I have Basically, I pop open all the envelopes and put them into four piles: I need to deal with this (unpaid bills, stuff to look at more carefully, etc.), I need to file this (statements), I need to shred this (less important stuff that may have personal info, like checks from my credit card company), and the trash can (envelopes and inserts).

I deal with the “need to deal” pile Most of this is usually handled with online bill pay. Usually, an item or two requires a bit of research. As I deal with these items, I note on them in pen how I handled it and move it to the “I need to file this” pile.

I file away all printed statements and receipts that could possibly have future use Everything in the “I need to file this” pile gets filed away.

I shred All the stuff in the shredder pile gets shredded up. I actually save the shreddings for kindling for camp fires.

I do any leftover financial review I deem necessary This would include stuff like reading a mutual fund prospectus, doing some research, checking my budget if I’m worried about it at all, and so forth. I don’t like to carry around a big “I ought to do this” list for my financial stuff, so I try to take care of it at week’s end each week.

And then I’m done! It takes between a half an hour and an hour and leaves me with a strong sense of accomplishment.

I didn’t see any archives where you unexpectedly come into money. My husband is re-enlisting for a big chunk of change (in the end we will get about 37k after taxes). Here is where we are now:
Credit Card 1 – 10k @ 14.25%
Credit Card 2 – 1k @ 16.99%
Debt consolidation loan – 11.5k @ 14%
Truck loan – 12K @ 12%

So you can see that we can pretty much wipe the slate clean there. Here is my real question. Will all that debt just gone, we will have a little over $2,000 a month left over. How do we make sure that we are not just going to blow it? We have four kids to put through college and a neglected retirement fund to look at. But it seems like it is just too much money to really handle. Help!

According to my math, that debt is about $34K, and you’re getting about $37K. With interest rates like those, you’re definitely in the right to pay all of them off as soon as you get the money. Step one is to get that debt completely gone – any time you’re paying out double-digit interest, you’re never going to get ahead.

This leaves you with about $2,000 a month in excess on your monthly budget, which is great. I also understand that, without a plan, you’re going to be prone to spending all of it, which is not great.

What I would do is start automatically putting that money in various places. Set up automatic deductions from the paycheck into a 401(k) and into 529 college savings accounts for each of your kids – $500 a month into the 401(k) and $100 a month into the 529s will eat up $900 of it.

What about the rest? First of all, I’d build up a nice emergency fund to protect yourself from things like a car breakdown – if your car dies and you suddenly have a large bill at the auto repair place, you don’t want to dip into credit to cover it. I would set a goal of having an emergency fund equal to six months’ worth of your monthly budget – with four kids at home, lots of things can happen when you least expect them. This will siphon off that extra $1,100 each month for a while, but when the time comes, you are going to be incredibly happy that you have that money.

What about when the emergency fund is full? Between now and then, spend some time with your husband figuring out what your most important goals are. Do you want a bigger house? A better retirement? Do you want to really fund your children’s education? Some amazing family vacations in the future? Paying cash for automobiles so you never go into debt again? Each of those goals points to different things to be doing with that money. By putting cash into an emergency fund now, you’re not only building security, you’re also giving yourself plenty of time to think about what you really want to do with your money after the emergency fund is completely funded.

My wife and I dream heavily of a country estate, for example, so we’re focusing on paying down all of our debts with some seriously large overpayments right now, then saving rapidly for this home.

The real key, though, is making it automatic – just set up automatic deductions into appropriate accounts. That means that you’ll never touch that $2,000 a month and never be tempted to spend it. Good luck!

Step 1: Log in to your ING account Enter your information and go view your overall account information.

Step 2: In the upper left, click on the “Open Account” option You can see it clearly in the picture above.

Step 3: Choose to open a new savings account on the next screen The “Open Now” link in the image above is where you should go.

From there, the process is really straightforward – you can call each account you create whatever nickname you like to identify it as a distinct fund: an emergency fund, a “house maintenance fund,” a “vehicle replacement” fund, and so on. From there, you really should set up automatic deposits into each of these funds so that you can always be building up these funds.

Why not do this instead of using Excel? In fact, I did do this for quite a while. I moved my primary savings out of ING Direct not too long ago, not because of the service, but because having all my savings accounts so easily available made them tempting. (note: I later moved everything back to ING because of HSBC troubles). I moved the savings accounts to a single HSBC Direct account, and I manage the distinct layers in Excel. I’ve actually left all of my old accounts in place in ING and when I’m ready to get money from HSBC into a particular fund, I withdraw it from HSBC directly into the matching ING account, so I can quickly see when that money’s there and ready to go.

Why? The biggest reasons for doing it this way all revolve around privacy. With only one account to manage, there’s less threat from identity theft and fewer passwords to remember (and potentially spill the beans about).

How do you do it? Each week, I make a standard deposit into the account, a percentage of which is intended for each of several different funds (two auto funds, a home improvement fund, an emergency fund, and a splurge fund).

In Excel, I have a six-tabbed spreadsheet that keeps track of these funds separately. There’s one “master” tab that keeps a running total of the account, and five separate tabs, one for each fund. I make sure that the summed total of all five funds match the balance in the account. Then, when I make a withdrawal from any of the funds, I just mark it on the balance sheet for that fund – the total for that fund is lowered and then the sum of all five fund balances again matches the total in the account.

What about interest? Each month, interest is deposited into the account. I usually “give” that interest to whichever fund can use it the most. Lately, it’s been going primarily into one of the auto funds.

An example Let’s say each week I want to contribute $200 to be split up evenly among five funds.

Weekly deposit I set up an automatic deposit into my savings account of $200 each week. In Excel, I mark that as a contribution of $40 to each fund every week. So, after four weeks, each of the funds has $160 in it, and the total account has $800 in it.

Monthly interest At the end of the month, the account earns $1.23 in interest. I decide to include that in fund #1. So, I go into Excel and add $1.23 to fund #1, leaving it with a balance of $161.23 and the other funds with $160. The total account balance is $801.23, which is the sum total of $161.23 plus four separate amounts of $160 each.

Withdrawals I then decide to take $50 out of fund #2 to buy a new Wii game. That brings the account balance down to $751.23, with fund #1 having a balance of $161.23, fund #2 with a balance of $110, and funds #3-#5 having a balance of $160.

Isn’t this confusing? Not really. If you’re diligent in keeping track of things with Excel, it’s actually very easy – and also rather fluid, because you can effortlessly “borrow” money from one fund for another fund if you need to. I find it very, very convenient, actually.

The good news is that she now sees the purpose of organizing one’s financial statements: they provide a great record of where you’ve been and where you’re going, plus detailed records can be huge at tax time if you choose to itemize your income taxes. I personally look at old statements regularly to track my progress in various ways; I often use them to build various models of my spending and I’m building a huge one now to estimate some payoff dates of my student loans, my home, and our next automobiles.

The only problem is that she can’t motivate herself to even get started making sense out of this huge pile of statements. It seems so overwhelming to her that she just can’t get started with that huge pile of paper.

My solution? Declare paperwork bankruptcy (sort of) and start over from scratch. Similar to email bankruptcy, it’s an acknowledgement that the pressure of the stuff you haven’t dealt with is enough that it’s keeping you from moving forward, so you simply just leave all of the old stuff behind. Don’t worry about filing anything that’s in that bin, but don’t throw it away yet, either. Here’s the plan I proposed to her, one that might be useful if you’re feeling nervous about getting started in a filing system of your own.

First, verify all of your most current statements so that you know they’re correct. If something doesn’t jibe, dig back until you can find the source of it and get it straightened out. Don’t declare paperwork bankruptcy until you’re sure everything is fine.

Next, figure out the essential documents that should be in your filing cabinet. I made an extensive list of the basics for your home filing cabinet in the past. Most of the stuff to include is pretty basic: tax returns, pay stubs, and so on.

Then start filing all of your receipts, statements, etc. I recommend having a section for each year and then folders within that section that break down the groupings, like electric bills, pay stubs, etc. Some of the documents (like a will, etc.) are timeless and should be in their own section. I find it very easy to do this once a week and let things pile up in a “to be filed” basket until that point. I just toss everything in there – receipts, statements, etc. – and then file them all at once.

What about all of that old stuff? If it’s in your “trash bin of doom,” don’t worry about retrieving it unless it’s a lazy Sunday and you feel like pulling all of that old stuff into your system. Instead, just start filing the new stuff and leave the old stuff alone wherever you have it. Let it sit for seven years (just in case you ever need to retrieve something out of it), then burn the whole thing in a raging inferno. A couple of boxes clearly marked “old papers” in the back of your closet or in a storage space is the best place for it.

What’s a moving average? Let’s say our telephone bills over the last twelve months were as follows:

May 2006 – $55
June 2006 – $55
July 2006 – $58
August 2006 – $55
September 2006 – $80
October 2006 – $55
November 2006 – $55
December 2006 – $55
January 2007 – $85
February 2007 – $55
March 2007 – $55
April 2007 – $57

Our basic cost is $55, but on occasion we use our phones outside of our calling area and incur some hefty bills. This happens roughly at random.

If we average the costs of these twelve bills, we come up with an average of exactly $60, which is what we estimate our next cell phone bill to be. Most of the time, it’s slightly under this, so we take that extra $5 and leave it in our checking account, where it earns interest. Then, when we get a higher bill, we can pay it off easily with the money we’ve been holding onto.

Easy, right? Here’s where it gets interesting. Let’s say our next bill, for May 2007, is $75. When we recalculate, we don’t just add on the new number, we drop the oldest one. Why? It reflects our situation far enough in the past that it doesn’t really reflect the actual use right now. So, when we re-average the numbers, dropping the oldest one and adding the new one, we get a new average of $61.67, which is how much we budget for for the June bill.

It’s really easy to keep track of all of this in Excel. We just have twelve rows (one for each month), and we just overwrite the bill from a year ago with the newest bill and Excel recalculates our budget for us. Over time, as we become more careful with our cell phone minutes, this moving average slowly drops and frees up more space in our budget. We can actually see frugality at work.

What about when the bill varies quite a bit? Let’s say our electric bills over the last year were as follows:

May 2006 – $50
June 2006 – $60
July 2006 – $65
August 2006 – $70
September 2006 – $45
October 2006 – $40
November 2006 – $50
December 2006 – $80
January 2007 – $85
February 2007 – $95
March 2007 – $70
April 2007 – $60

This is roughly typical for the Midwest, as fall and spring electricity usage is always much lower than summer (when you need air conditioning) and winter (when you need heating).

If we average the cost of these twelve electric bills, it comes out to $64.17, which we use as an estimate for the upcoming electricity bill. However, we do know that in the winter and summer it’s going to be more than that, and in the spring and fall, it’s going to be less than that. So, we budget in $64.17 for electricity for May, knowing that almost assuredly our bill will be less than that, and we leave the excess in our interest-bearing checking account. Then, in August, we use that money we left in checking to pay the inevitably higher bill, and we’ve earned a bit of interest in the process.

Much like the cell phone example, when we initiate cost-saving measures (like installing CFLs), it causes all of the bills to drop, and over time we begin to see more breathing room in our budget (which usually means more money in the bank). Excel makes this all automatic, thankfully.

What happens when you move and all of the numbers change? First thing, we take the utilities estimates from the previous owner and add 20% (to give us plenty of leeway). Then, we enter this number in for all twelve months, so the moving average is actually just equal to the estimate plus 20%. When we start receiving bills, then we start entering real numbers – almost assuredly, the real bills will be lower than our padded estimates, so over time our budget will gain breathing room rather than losing it.

Include the debt, but don’t include the house at all. The argument here is that if it’s your primary residence, then you’re not going to be liquidating it ever, thus it’s not an asset. For many people, this would push their net worth far, far into the hole and if you’re making interest-only payments, it’s a hole you’ll not be climbing out of.

Include the debt, but only include the equity in the house. In other words, only include the portion of the house that you could draw equity from through something like a home equity line of credit. This means that any payment directly to the principal actually counts double towards your net worth, as it decreases the debt and increases the equity in the house.

Include the debt and also include the purchase price of the house. This means that the house itself has no direct effect on your net worth upon purchase and it slowly goes up as you reduce the principal of the debt. Many people seem to follow this path because it somewhat disguises the debt.

So what are we going to do? We’re going to actually follow a fourth path, which is an interesting one.

Include the debt, but only include the assessed value of the house. This means that right after purchase, our net worth takes a small hit, but as time goes on it climbs back as we make debt payments. Plus, each time the house is reassessed, the value of that asset changes – and given the location and the quality of the house, it will likely go up. In essence, this route means we are not counting the appliances as assets in any way, nor are we considering some of the more aesthetic appeal of the house that isn’t directly affected by the tax assessment.

What this means is that in the short term, my monthly net worth calculations will look disastrous, with some big losses, particularly in the month where we sign all the papers and take possession of the house. After that, however, our net worth will begin to climb again, albeit at a slower rate than before because our housing payments are going up. Then, whenever our home is reassessed, our net worth will likely see a bump (even though that also means that we’ll be paying more in taxes, which is a downer).

I would recommend that others follow the same path as well for including the primary residence in calculations. It is an asset and can be liquidated, but the aesthetics of the house and the appliances within and so forth will often make some difference in the actual purchase price that may only be of value to you.

What are wants and needs? In a nutshell, needs are the things that you absolutely have to pay in order to live and avoid bankruptcy: housing payments, taxes, groceries, commuting costs, and so on. Wants are the things that you spend money on that you don’t explicitly need, like dining out or music.

As a rule of thumb, my wife and I allow each other a certain amount of wants in a given month, because life isn’t fun if you can’t have anything that you want. My wants are usually books, food, and occasionally music; hers are much more varied. By capping our wants at a reasonable level each month (and also with the peer review process on such spending), we often find ourselves saving quite a bit of money each month.

The tricky part is determining whether some of your spending is a have or a want. For example, let’s say we have beef burgundy for supper and in order to make it, we have to buy a new bottle of cooking wine (we generally buy pretty cheap wines for cooking wines, like “two buck Chuck”). It’s not explicitly a need, as you can prepare food at home without it, but it also really stretches the definition of want as well, as things like cooking wine enable us to prepare delicious meals at home that encourage us to eat at home instead of getting takeout or eating out, so in the long run buying a bottle of cooking wine is a money saver for us.

Here’s the process we go through to determine if something is a need or a want:

First, we list all of our spending that isn’t strictly essential in a month. Things that are essential are housing bills, most gas costs, staple foods, medical bills, insurance, and so on. These are things that we have to pay no matter what.

After we’ve made that list, we list everything that’s clearly a want. Entertainment and hobby expenses, dining out, and so on go under this category and immediately go on the want list.

This leaves us usually with a handful of things that we talk about – things like the cooking wine and so on. This process is more organic, but it usually comes down to the following question: would we have spent more money than this had we not purchased the item? With a bottle of inexpensive cooking wine, the answer is usually “yes,” because we likely would have eaten out more often without tools like that in the kitchen, thus costing us more in the long run. We use a similar philosophy to mark things such as CFLs as needs.

After this process, reviewing the list of wants helps us keep our eye on the financial ball each month. We usually strive to keep ourselves within our self-imposed allowance – and thankfully, we’re both usually way under the limit.

What is an electronic financial document system?

Basically, it just means that instead of saving paper copies of your financial records, you save them all electronically, saving only paper copies of the most vital documents. This can save a tremendous amount of space, plus make it much easier than before to find and search through your documents.

Here’s an example: let’s say you wanted to find all of your credit card charges for gas in the last year. With paper records, you’d be going through the filing cabinet for an hour: with an electronic financial document system, you just click a few times and search through a handful of PDF files, retrieving the info you want in just a few minutes.

The benefits of such a system include:

It saves space Having all of your financial documents in electronic form is a lot more space-efficient than having a filing cabinet.

It’s easier to search Finding the specific information you need in an electronic system is much quicker than in a system of file folders, especially if your question is rather esoteric. This is especially true come tax time. To me, this is the true benefit of electronic financial documents.

It’s easier to back up Backing up an electronic system basically involves a blank DVD and a DVD burner (or even a CD and a CD burner for a small archive). That’s a lot easier than a filing cabinet full of photocopies.

On the other hand, the drawbacks of such a system include:

It takes longer to file things away When you get a new document, you have to scan it and add it to the system. This can take substantially longer than merely putting it in the appropriate folder in a filing cabinet. This can be mediated, though, by having an efficient system as described below.

It’s slightly less reliable. Filing cabinets typically don’t have disk errors. The best thing you can do is to make sure you have a paper copy of everything truly vital and also be sure to have plenty of backups.

It’s slightly less secure. You will probably want to have some security on the drive, such as having it attached to your desk with a steel cable or something to that effect, as well as data security software like TrueCrypt. A hard drive is much easier for someone to take than a locked filing cabinet.

What do I need?

Here are the components of the system I’ve set up.

A home computer Yep, that’s the basic piece. A few free USB ports and a CD or DVD burner are also needed peripherals.

An external hard drive Over time, this data will really add up. Plus, you’ll want the ability to easily move this archive to another computer. Thus, I recommend an external USB hard drive for storing this data.

A scanner / printer These may or may not be two separate devices. You’ll obviously also need the software for both.

Adobe Acrobat Standard (not Reader) This is my preferred format for storing the documents. Acrobat does a great job of handling character recognition from your scans, making it possible to do text searches of all of the stuff you scan in. Plus, Acrobat files are quite portable.

Blank DVDs These will be used for backups. I highly recommend monthly backups for all of your data, but especially for this type of data.

How do I do it?

This is a step-by-step example of how I set up my filing system. Your filing system may differ – the important part is that it makes sense to you.

First, I devoted an entire external hard drive to financial storage. This meant that everything on this external hard drive was nothing but financial documents. It connects via USB and is hidden in a locked desk drawer. I get it out when I need it.

On that drive, I created a series of top level folders for each entity I conduct financial business with. I have an IRS folder for my taxes, a Vanguard folder for my investments, an Alliant Energy folder for my electric bill, and so on.

Within each folder, I have a folder for each month. “December 2006″ and so on. Within each of those folders, I store the actual scanned documents with a filename that includes the date I received it as well as a brief explanation of what it is. So, in Alliant Energy / March 2007, I have a scanned copy of the bill I received during that month as well as a copy of my receipt for the online bill pay.

I also have a series of “shortcut” folders based on year. At the top level of the drive, I have a 2007 folder, and under that folders for each month. Inside of each of those folders is a direct alias to all of the folders on the drive for that month. This saves time in searching for documents.

Actually getting the documents in there is simple. I just scan them directly into Adobe Acrobat, save them appropriately, then shred the document. Once it’s shredded, I save the shreddings for campfire kindling (seriously, shredded documents makes for great kindling). I only save documents of vital importance.

Once you are used to the routine of scanning and shredding, it becomes very simple to archive all pieces of financial information that come your way. I am now actually archiving grocery receipts and so forth to make it easy to analyze my shopping habits.

In short, even though it takes a bit of work, it’s well worth the extra effort because of the constant convenience of having your financial information at your fingertips.

This begs the question: if traditional budgets are so hard to follow, why do books keep encouraging people to make them? If you go through all of this trouble of setting up a budget, only to discover that it’s very difficult to follow, why go through all the trouble in the first place? After all, it’s much like starting a strict diet: you try so hard to follow it, but eventually you binge and you’re right back where you started – or worse. A grid on a paper can never truly contain the complexities of a human’s life, nor is it meant to – that’s why strictly following a paper budget (for most people) is doomed to failure in the long run.

Given that, there is a compelling reason for constructing a budget, but it’s not the reason that most people think of when they think of a budget. The truth is that a well-constructed personal budget is a psychological tool, not a financial one.

If you actually go through the appropriate steps of building a budget for your own life, which includes tallying up all of your spending in various categories, seeing where the fat is, and determining what you can spend in each category, you’ll discover quite a bit about your true financial state. This picture of your financial health, in black and white, should scare you a little. Are you really spending $600 a month eating out? Is it really necessary to drop $750 a month in entertainment expenses? Did you really spend $360 this month on music concerts and CDs?

This is the part of the process that has power for everyone. Are you really spending your money in a healthy way? For almost all Americans, the honest answer to this question is “no,” and a budget is just a detailed image of this fact.

This is not to say that a budget in the traditional sense doesn’t work; it can and does work for some people, just not everyone. The important thing to remember is that the construction of a budget is the part that can really have a great impact on anyone if it’s done right, with a lot of care and thought.

If you’re in a situation where you really need to turn things around, but you don’t know where to start, one of the smartest moves you can do is properly construct a budget and think about what it really means. Actually following the budget to the letter may not be the best path for some people (it wasn’t for me), but the process of actually constructing one can be valuable for everyone.

If you’re a reader of this site, it shouldn’t surprise you that I started digging into various reading materials on how to create an effective filing system for yourself. I dug into many different sources and finally developed a filing system that I think will grow with me for many, many years to come. This morning, I discussed doing a financial spring cleaning; this is a major project that can really clean out and organize financial papers.

Choosing A Filing Cabinet And Materials

Choosing a filing cabinet is a little more in-depth than just saying, “Ooh… that one looks pretty!” Why? It has to be a functional object as well; a well-made filing cabinet makes the job of filing incomparably easier than a pretty but poorly-made one. Here’s what to look for.

A good suspension system Does it open and close smoothly with some weight in it? Grab some heavy books and put them in a drawer. Does the drawer still slide in and out smoothly?

Counterbalancing Open all of the drawers and put a heavy book in the end of each one. If it causes the cabinet to become unstable or tip, move on.

Thick and rust-resistant metal Look at the metal; does it seem thick to you? Look at several; it quickly becomes apparent what sturdy metal is like. Also, check that the metal is rust-resistant – you want this cabinet to be sturdy for a long time.

Look for the Underwriters’ Laboratory seal This means that the cabinet should be able to resist most home fires – a test cabinet withstood 1700 degrees Fahrenheit (the temperature of an average house fire) for one hour without the internal temperature exceeding 350 degrees Fahrenheit. Paper burns at 451 degrees, so all of your papers would be safe.

Your local office supply store should be fine with you doing these things to a cabinet that you’re thinking of buying. If not, don’t do business with them.

What Goes In The Cabinet?

Why would a person need such a cabinet? After all, there’s not that much stuff to file, right? Wrong. The more I listed and thought about the useful and worthwhile things to file, the more I realized I needed a big, good filing cabinet. Here’s what needs to be stored.

Fundamentals

Personal papers This includes things like a Social Security card and a copy of the birth certificate of each person in the household, as well as any other necessary identifying materials.

Tax returns I have every tax return I’ve ever filed, along with all materials associated with the reporting. At the very least, you need to keep these for seven years running to prevent yourself from being audited by the IRS.

Deeds, titles, and surveys You need to keep the deeds and titles for all land and property that you own. If you have title insurance on these materials, you need to include information on that insurance, too.

Emergency Protection and Prevention

Insurance policies Health insurance, disability insurance, homeowner (or renter) insurance, and auto insurance all need to be stored at a place where it can easily be found when you need it. Most of the time, this stuff will just sit there, but when you need it, you need it.

Household inventory This is a complete list of every item in your residence that you own and that has significant value. Make and model, identification numbers, and serial numbers should all be here, along with receipts.

Instruction manuals and warranties This is less important, but it is very useful to have a central location for all of the manuals and warranties for the various items you own, everything from refrigerators and microwaves to televisions and digital cameras.

Hard drive backups I have a folder with two DVDs in it that contain hard drive backups. I try to do backups every month so that if something disastrous happened, I would have the data.

Financials

Paycheck stubs I get mine online, but I still print them out to keep them. They’re a great way to demonstrate how you make money and also for checking that appropriate money is being withdrawn from your checks for tax purposes and so forth.

Employee benefit statements and plans This lets you keep track of additional job benefits, like flexible spending plans, along with the documentation on how they work. Don’t forget about benefits at work like these, as they are often free money if you know how to use them.

Retirement statements and plans I also include Social Security statements in this grouping. In short, these demonstrate the savings you have made for retirement, as well as your pension options.

Credit card statements Although these aren’t as vital as some of the other things, credit card statements over a long period are a fantastic way to really keep track of your spending over the long term. I keep a folder of these organized by due date.

Debt documentation You should also keep a folder describing any and all debts you owe, as well as any and all debts owed to you.

Investment information I keep a folder for my accounts at each investment institution, along with a few years’ worth of statements for each so I can carefully study my investment growth if I wish.

Charitable donation receipts My family makes quite a few charitable donations in a year. We keep these in a folder by themselves for tax purposes.

In Event Of Death…

A will This is useful for ensuring that specific personal items go to the people that you want when you pass away, and can also handle the cash from a small estate.

Trust documentation If you have a large estate, you may wish to set up a living trust to make the transfer to beneficiaries much smoother. Keep all documentation on this.

A durable power of attorney This indicates who has legal powers over your estate in the event that you are incapacitated but still alive. This is a simple document to set up.

A living will Do you wish to be put on a respirator in the event of an accident? How about other medical procedures? A living will clearly and legally states your wishes in terms of medical manuevers to extend your life in situations where you may be unable to make your wishes known.

Life insurance policies You also need to store your life insurance policies so that in the event of your passing, your executors and beneficiaries can easily find this information.

Most Importantly…

A master document explaining what all of this stuff is This is mostly a guide to the executor of your estate, containing all important information not contained in the other documents and also explaining online account access and other such information, like where a safety deposit box key should be and such. This may also include personal letters to people for them to read in the event of your passing and so forth.

Organizing It

There is no tried-and-true method of organizing your information. What matters is that (a) you have it all in a central location so you don’t have to search for it, and (b) your organization within this central place makes sense to you and it is explained in the master document. That master document must be easy to find, but aside from that, it’s up to you.

If you don’t have any idea where to start, organize the information as outlined in this list, with folders (or groups of folders) matching each category. Then print out this article and put it with the master document so that you (and others) can always understand the basics behind the filing system.

What About A Safety Deposit Box?

I include copies of some of these documents in my safety deposit box, like the household inventory, notarized copies of the deeds, and so forth. Why? This protects against events such as tornadoes that can go beyond the destructive force of a fire.

In short, you should strongly consider a filing cabinet and appropriate documentation of your finances and your life, especially if you have a family to consider.

Go through your files and get rid of unneeded stuff Once you’ve filed your 2006 taxes, you only need to keep supporting documents for the previous seven years. So, everything dated prior to January 1, 1999 (except for old returns, which are always worth keeping) can bite the dust. Get out the paper shredder and start eliminating the old stuff.

Research any investments you might want to consider If you’re like me, you save prospectuses and printouts on investments that you may want to look at, and your investment firms also send you prospectuses on what you’re already invested in as well as ones that you request and may interest you. Take a few hours and read through them – I wrote a guide on how to read a mutual fund prospectus – and decide if any are worth your time to begin investing in, or if something you’re already investing in has changed direction and you want out.

Rebalance your portfolio Unless you’re completely getting out of a particular fund, rebalancing your portfolio shouldn’t mean selling any asset. Instead, it just means that you’re deciding where to put your investments for the next several months to a year. Let’s say you have committed yourself to 50% in Fund A, 25% in Fund B, and 25% in Fund C. Over the last year, that’s how you’ve put money in them, but Fund C has done really well lately, leaving you with 47% in Fund A, 23% in Fund B, and 30% in Fund C. This means that you should move things so that you’re putting, say, 60% in Fund A, 30% in Fund B, and 10% in Fund C for a while, so that after some time your overall investment moves back to where you want it. Don’t get greedy and start dumping everything into Fund C just because of a strong short run with it, though; the reason you have a diversified portfolio is to protect against risk, and by jumping on a short term bandwagon, you’re adding risk to your portfolio by putting more money into something volatile.

Review your spending for the year so far and see if you can increase your automatic savings and investment deposits. I usually do this in April and October, and almost every April, I discover that I can put more away than I was, mostly due to annual raises that occurred in the December-January timeframe. I usually channel it into my emergency fund until October, at which point I look at redirecting some of that emergency fund depositing into an investment.

Count up your loose change and bills and prepare it for exchange and deposit I keep a giant jar of loose change, loose dollar bills, and so on. By tossing them in there when I acquire them, it keeps me from spending it on something frivolous. Thus, every six months, I usually have some amount of money stored up and I prepare it for deposit. For me, this means preparing it to the specifications of my bank, as they accept change if it’s in a clean container. I also count it just to make sure it matches closely with what the bank counter says. Then, I stop by the bank sometime in the next few days and cash it all in as a deposit into my checking account.

Do some long term planning. I check to make sure I’m still on pace to meet my goals for my son’s college education and also for retirement. This year, it also means setting up a 529 college savings plan for my second child and setting up an automatic investment plan for the coming baby (this is actually what I’m doing with my increased investment this year, from that earlier step). It basically identically matches what I’ve done for my first son. I live in Iowa, which has one of the best 529 plans in the country (managed by Vanguard – another plus in my book). As for retirement, I check where I was six months ago versus now and model that out to retirement; if it’s looking low, I try to get more money in – and if it’s looking high, I smile and wait.

For me, these activities will eat up most of a Sunday, but at the end of the day, I feel really good about my financial state. Take a lazy day sometime and do some financial spring cleaning – it will leave you feeling more secure as well.

While gearing up for this year and purchasing some tickets for both minor and major league games, I realized that many of the concepts I have about personal finance are similar to how I feel as a fan of the downtrodden Cubs. For example…

Wait until next year. This is the Cubs unofficial motto, and it’s also one that I’m beginning to employ. Instead of pulling the trigger on big purchases as soon as they seem possible, why not wait another year before upgrading that car? Why not wait five so that I can just write a check for it?

Enjoy the simple pleasures. As I mentioned above, there are few places that I’d rather be than in a seat at Wrigley on a warm June day with a nice breeze blowing in off of Lake Michigan, holding a hot dog in one hand and a giant beer at my feet. I want to teach my son how to fill out a scorecard and encourage him to bring his glove to the park. And I want to see the look of excitement on his face when he catches his first foul ball (I remember mine, caught at a minor league game in the mid 1980s). The simple pleasures in life for me are spending time with my son and remembering times long past – and those don’t cost anything at all.

Keep an eye on the details, but don’t let go of the big picture. I love statistics, and I love watching the little strategic elements of baseball, but I still love jumping to my feet as a ball goes flying off in the distance and the utter beauty of a well-kept baseball diamond. No matter how caught up I get in the details of what investment is right, the important thing is that I’m putting money away at all.

Remember the great stories of those who shined long ago. My son will probably grow tired of hearing about the 1984 Cubs (the first baseball team I fell in love with) and about Leon Durham’s inability to catch a grounder. But he’ll also hear about my grandfather and his frugal ways as well. Sometimes, the past can be our greatest teacher.