Editor’s note: Today I have for you a guest post by my good friend and a great personal finance blogger Graham: the mind and heart behind the Moneystepper blog. Hope you enjoy his post, follow his example and track your finances. Knowledge is power, remember?
The definition of a budget is: “An estimation of the revenue and expenses over a specified future period of time.” Making a budget plays an integral role in building long term wealth.
What is equally important, and makes the budget worthwhile, is to track your finances (in detail) against this budget. Without the persitence to track your finances, you might as well not have a budget.
Multiple studies have shown that wealthy people spend more time making and reviewing their budgets than the less wealthy. They don’t track their finances because they are wealthy: they are wealthy because they track their finances!
The five-step budget approach – don’t stop at step 2!
How does budgeting relate to keeping records? Well, it’s a three step approach:
- Make a detailed budget
- Track your actual expenditure against the budget
- Determine why your actual expenditure differed from your budget and why
- Amend your actions accordingly
- Amend your budget accordingly
Most people don’t make it to step 1. The majority of the rest only make it to step 2. However, the third to fifth steps are what make budgeting beneficial for your future wealth.
Today, I’ll focus on step 3. When determining why your expenditure was different to your budget, many of the reasons will be due to your actions: you spent too much on groceries, you went out to eat too many times, etc.
However, more often than you may think, you will run into mistakes made by other people looking after your money, which you otherwise would not have identified.
Trust is important. However, when it comes to trusting others (either individuals or companies) to keep track of your finances, don’t do it! They can’t do it! Companies are very good at making their owners money. They are not so good, however, at looking after and keeping track of your money.
In short, companies are dumb.
You, and only you, can be the controller and guardian of your finances. I’m sorry to say it, because it’s a little dull, but you need to be record absolutely everything.
I’m sure that most of us remember our parents having big folders or box files will all their receipts and records in. Most of us probably look back and think how unnecessary that was.
Well, it is and it isn’t.
With modern technology, keeping bulky paper records of all our transactions isn’t necessary. There are some great tools available which can help you scan and electronically document all your files. Just remember to keep a back-up!!
What is essential, however, is keeping these records somewhere.
The worst culprit…
I mentioned that companies are dumb. They are. But, the “dumber” to this dumb are banks!!
The Financial Conduct Authority (FCA) receives 3.1 million complaints each year related to just the five top UK banks. And that is only the people who complain. There are probably millions more who have had problems and not submitted a complaint to the FCA.
In only the last 3 weeks, my bank has made two errors related to my mortgage repayments which would have cost me upwards of £500 if I had not noticed them.
The only reason I did notice them was because I keep very accurate records.
Mistake 1 – “The Gremlin”
This was spotted because I am a geek. When it comes to finances, you too should be a geek.
My mortgage repayment is my largest expense (and liability). Obviously, it therefore has a place in my budget and I keep extremely detailed records related to any mortgage expenditure. I print off and save a copy of my mortgage statement every 3 months. Furthermore, I record in Excel my outstanding balance each month, my interest (calculated by me and then the actual interest) and my capital repayment.
I update this every month so that I know what my balance is and can track all of my transactions. And it was a good job I did.
On January 2nd, I noticed that my balance had increased compared to my spreadsheet. I looked at the detail, noted a December interest payment added on January 2nd. After updating in my spreadsheet, the monthly interest was the same, but my balance was still not right.
I then checked my online statement against my records for the year. While every “transaction” was right, every single “balance” was overstated by around £450.
So, I pulled out my quarterly print outs. Same thing was present on those. Finally, I worked out via my online statement, that my opening balance in January 2013 (last year) had gone up.
I phoned the customer service line and after several minutes explaining the difference, the representative identified that my December interest had been added not only in December 2013, but also in December 2012.
A “gremlin in the system” the representative noted. A gremlin, which without my records, I would never have seen.
Mistake 2 – We agree to disagree
Same bank, same mortgage product. Yes, it is about time I looked for a new provider!!
This time, I decided to make an overpayment on my mortgage (quite a significant chunk). Because I am currently tied it to a long term deal, this made financial sense to do so, even when incurring an overpayment charge (trust me, it did!).
So, I calculated what I thought my overpayment charge would be and phoned to bank to agree this amount. They agreed.
3 days after making my overpayment, an “overpayment charge” was added to my account which was £60 more than expected. I phoned up the bank, and after 15 minutes of number crunching, they admitted error and credited my account for the difference.
Again, this is something which would have passed me by and never been resolved if I hadn’t kept good records.
So, within 3 weeks, my record keeping has saved me over £500. Whilst keeping these records takes a few minutes each month (I am pretty efficient at them now), the effective wage per hour I have saved makes this an extremely well paid job!
Do not trust others to do the sums correctly; always check them yourself! Be the master of your finances!
Do you check your finances regularly and what do you consider ‘regular’?
Author’s Bio: Graham from Moneystepper contributed this article. Moneystepper is a blog that provides advice on taking small steps every day, which have a much bigger impact over the long-term. Daily posts cover every aspect of money, investing, saving, real estate, taxes & the economy: everything you need to increase your net wealth in the short, medium and long term.