All of us know that we have to take care of our finances in order to make our money grow and make ourselves as rich as possible. But it appears not so easy to manage our finances. I have been working on improving my personal finances system since year 1998 and I have tried a lot of systems, tactics and ideologies. Some of them were practical, others - stupid. Some of them needed a lot of work and I have thrown them away. Others were too simplified and weren’t suitable for me.

After these years of research and tests I have found for myself three key-ideas that make every personal finances system valuable and effective. If your system doesn’t have all the three key ingredients, you can be sure that you are going to leave this system sooner or later and it won’t work for you.

In this post I will reveal these three points and will give you some examples of how they work and why they are so valuable.

The three main steps for one personal finances system to be effective are:

1. Budgeting
2. Monitoring
3. Reporting

Now I am going to review all the three steps in detail:

Budgeting

The most imortant thing for you is to prepare your budget for the next/current time-period. Why is that? Becasue by planning your expenses and income issues you will be able to get the big picture of your financial status. In my practice I prepare budgets for the:

• Next month - on the last Sunday of current month.
• Next quarter - on the last Sunday of current quarter.
• Next year - between Christmas and New Year.

The regular structure of my budget-template consists of the followin categories:

• Expenses
  • Loans
  • Insurance
  • Home
  • Transportation
  • Self-development and Education
  • Appearance and Style
  • Fun
  • Other

• Income Issues
  • Regular income
  • Web design
  • Online income
  • Other

Each of these categories has sub-categories. I have prepared an Excel template which is able to calculate everything itself. So, when I enter the values for every issue I can see the total amounts by category and the grand total amount.

Such budget template is included in my One Job Two Salaries Instant Success Kit.

Having this budget, I am able for seconds to see what is going on with my finances and make certain decisions on forcing money making activities to cover the expected monthly expenses or otherwise - to plan where to invest the superfluous money.

Monitoring

Monitoring money is one of the hardest things to do, because you should register all your transactions daily. This is not an easy job to do. If you succeed to do this daily for a month you have my respect and congratulations!

First I tried to use Excel sheets designed by me, but currently I am using the Microsoft Money Plus software. It is cheap, it is easy to use and I love it.

* Note: I know that in MS Money there is an option to prepare your own budgets, but I prefer my Excel sheets because they are portable and are always in front of my face.

The purpose of monitoring is you to know at every given moment how much money you have, what is your current financial status. Having this information you are able to manage your payments and incomes in order to cover the planned budget and finish the month with more money than you’ve started it.

Reporting

The last crucial thing for yiur finances is the reporting ability of your system (or software). Reporting gives you aggregated data about your transactions and you status at the end of the time period. This is useful (no, it is not useful, it is crucial), because:

• This way you know your current financial status - where are you?
• You can judge whether you’ve achieved you financial goals for the month/quarter/year (which were set in your budget) or not.
• You can make an adequate decision what to do now and how to manage the budget for the previous month/quarter/year.

So, your finances management system should support at least the following report templates:

• Your expenses chart/report shown by category (the budget categories apply here).
• Your expenses chart/report compared to your incomes.
• Your expenses and incomes chart/report for a given interval of time.

Using the reports you will be able to adjust your next budget, make informed financial decisions and take control over your finances.

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Whatever personal finances system you use, look for the three key-ingredients. You will need them to manage your personal wealth and financial growth.