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“If you can count your money, you don’t have a billion dollars.” – J. Paul Getty

The odds are you aren’t doing a very good job at all. But if you have an income and expenses, you need to be keeping track of your cash flow. You should know every penny coming in and going out, and you should be conscious of how your financial decisions are affecting your bottom line.

With the proliferation of debit cards, many people have come to rely on banks to track their transactions for them. They spend freely, with only a mental estimate of what their balance should be. But depending on your bank to record your transactions is not the same as keeping your own records. Letting someone else track your balance is just a cheat to avoid taking responsibility for financial decisions. If you don’t see the money leaving your account, you don’t actually feel the ramifications of that expense.

The solution is to keep a ledger of all your accounts. By recording every dollar that you earn and every dollar that you spend, you will:

1. Become fully conscious of your personal financial state

Personally recording every transaction is a powerful mental trick that keeps you aware of your money.

2. Reduce your frivolous purchases

When you know you’ll be forced to relive a poor decision in the future (by the act of recording it in a ledger), you’re less likely to make that poor decision in the first place.

3. Have real data about your finances that you can analyze at any time

You can’t figure out where your money is going unless you have a record of every transaction. You can’t know if you are making or losing money unless there’s a written history.

I’ve developed a system that works well for me, which consists of the following:

• I keep a set of notebooks together with a calculator in a commonly-used desk drawer.  This forces me to acknowledge its existence on a regular basis.
• Whenever I make a purchase, I keep the receipt and put it in my wallet.  If a receipt isn’t offered, I ask for one, or make a note on a scrap of paper including the amount spent and the item(s) purchased.
• Several times a week (almost every other day) I go through my receipts and enter them into my notebooks.
• On average, I sign in to my online banking account once a week to make sure all my numbers are in order, and to verify and record any automated bill payments.
• Once every month or two, I tally up all my accounts and record current balances.  If I include all assets and liabilities, this essentially gives me my net worth.  By doing this occasionally, I can see if I am being “profitable” or if I am losing money.

Although certainly not the only way to track your finances, there are a few key observations to make about the method I use that are applicable and required in any system:

1. Every transaction is recorded

If money goes in or out, it winds up in the books.  This keeps me accountable to myself.

2. It scales well

From daily transactions at the deli to monthly bills, to changes in my brokerage account balance, all my accounts can be managed following the same basic rules.

3. It requires regular maintenance, but it isn’t overwhelming paperwork

If the system didn’t require frequent attention it wouldn’t function as a tool for financial accountability.  On the other hand, I don’t have the time to dedicate to a system that requires constant maintenance.  My system strikes a balance that fits my needs.

4. It works for me

Having a system that doesn’t work for you is worse than having no system at all, since you will have the illusion of control without the benefits.  My system works well for me because most of my transactions involve receipts; if I functioned primarily using cash, I would have to adjust the system accordingly.

After recording all my transactions for several weeks, the process of going through receipts and entering them into the ledger becomes second nature; in fact, it is such a normal part of my routine that I actually feel uncomfortable if I go too long without “working the books.” It’s become awkward to walk around without having a reasonable idea of my account balances, which bills are coming up, and what debts are outstanding.

Most importantly, I’ve forced myself to acknowledge each and every expense.  Whenever I find myself making an unnecessary purchase there is always a voice in my head saying “you’re going to kick yourself for this later!”  And if I go ahead any buy the item anyway, I dowind up scolding myself down the line, when I see the balance in my ledger being decremented.

How do you keep track of your finances? Do you rely on your bank, or are you actively engaged in monitoring your cash flow?  Do you feel you’re doing a good job of maintaining your personal finances?  Leave your thoughts and opinions in the comment section below!