Financial Consciousness 101

I’ve written before about managing our money with a higher level of consciousness. But I have yet to discuss any concrete ways to work on developing more financial mindfulness…

In Your Money or Your Life, Joe Dominguez and Vicki Robin draw an interesting parallel between finance and meditation. In most forms of breathing meditations, we strive to become more aware, more present, by watching our breath. To accomplish a similar outcome with our finances, we watch our money- every penny of it, by keeping detailed records.

It’s pretty simple:

Every penny that leaves your life is recorded as an expense.
Every penny that enters your life is recorded as income.

At the end of the month, it’s helpful to tally up the totals. Then you can figure out the net difference (which is hopefully a positive figure!) between money-in and money out.

With this one little number you get a reliable indicator of your financial health. You probably worked hard over the past month, but what do you actually have to show for it financially? Do you have more savings now than 31 days ago, or did you bleed more cash than came in? Either way, the documentation you kept along the way provides a means to scrutinize what happened.

There’s really no specific goal or end in mind, other than increasing awareness. It becomes nearly impossible, however, to spend money without giving it at least some conscious thought. For that reason, it’s likely any costly spending habits that have long gone unacknowledged (insert crack about $5 Starbucks lattes) will be exposed.

I’ve done this off and on several times in the past, but I never considered implementing it as a ongoing habit (read: I got lazy). I started again last month with that intention though.

Here’s a couple of guidelines that I’ve identified for myself:

1.) Use specific descriptions. For example, an entry labeled ‘food’ doesn’t mean much. This could be anything from staples at the grocery store to an expensive dinner out on the town. Big difference.

2.) Don’t go too overboard. Speaking of groceries, it almost certainly wouldn’t be worth the time to list out every single item. I would just list the total. Just look at the receipt if you want to see it in more detail.

Then again, don’t cheat. Don’t buy magazines at the grocery store and sneak them in under ‘groceries’. Make a separate entry. Same goes for alcohol, and probably should as well for any empty-calorie food or beverage. Honesty is key here.

3.) Voluntary contributions to 401k’s and similar tax-advantaged accounts should probably be counted as income. Even though they are pretax dollars, and you never actually see them in your paycheck, it’s still money you earned and are voluntarily saving. This will also give you a more accurate end-of-month figure how much you are actually saving. Of course, hopefully this won’t be your only savings though.

4.) Big, lump-sum payments can be broken down into monthly expenses. For example, if you pay for 6 months worth of car insurance at once, it only makes sense to divide the payment by 6 and apply it over the next half-year instead of all at once.

5.) You’ll also need to decide how you treat interest and dividends. I consider all interest and dividends received in taxable accounts as income. The fact that I don’t use it like normal income doesn’t matter much to me; it’s still money coming into my life. Plus, I’ll record any taxes I pay next April as an expense, so it’ll be accurate. As for dividends received in my Roth, I don’t record these. Outside of actual portfolio maintenance, I basically just pretend like that account doesn’t exist.

There may be some other quirks that you may need to consider, but it’s not meant to be complicated. Once you take the time to get organized and make it a habit, the ongoing time investment is minimal. I just use a simple spreadsheet, which works great, but paper would work just fine as well.

So this is my challenge; if you don’t already do so, try tracking your expenses and income, down to the penny, for 30 days at the bare minimum, then reevaluate. A longer trial (90 days maybe) may be preferable, but my guess is that even one month is sufficient to make it a habit you won’t want to give up.

Part 2: An overview of how I plan to use Excel to visually observe my savings progress over time.

Note: A big thank you to J. Money over at the awesome blog Budgets are Sexy, who agreed to publish a guest post of mine why he is on vacation. Thanks J!