The invention of the computer has enabled an increase in efficiency and ability when it comes to managing our personal finances. Quicken by Intuit, and its counterpart, Microsoft Money, are the two leading personal finance software platforms, and have gone through years of development and revisions to make them outstanding financial tools. For some, however, even the best software leaves something to be desired. Thankfully, software engineers have enabled a high degree of customization in Quicken that is simply not available with the new trend of "online financial managers." This ability to customize the program allows each user to fit the software to their personal situation.
One of the things that has always bothered me about personal finance software is the amount of detail in transaction-level tracking. For example, do I really need to know if my money was spent on "Pet Food," "Veterinarian Expense," or "Pet Toys," or does it suffice to have a category called "Pets?" As I will show you in this article, you can think in even broader terms. I have always strived to keep my categories simple, but after having followed one of my favorite blogs for some time (www.zenhabits.net, I decided to give them another look and re-evaluate how I was really using categories.
The most important question to ask yourself before you start is: "What do I need the software to tell me?" For me, it was a general overview of where my money was going each month (in very broad terms, and hopefully using easy-to-read charts), and a running average of unexpected expenses that crept up every month. I used this question and answer as a guiding principle when evaluating my system.
Working with categories in Quicken is a fairly simple process. Selecting Tools > Category List from the menu brings up the master list. Deleting categories is as simple as selecting one and clicking Delete. Adding a category is only slightly more complicated, as you must deal with a pop-up window and select whether the category is and income or expense, a tax-related item, and if it's part of a special group. If you already have transactions entered, it is recommended that you set up the new categories first, then delete your old categories. When you delete a category that has transactions assigned to it, Quicken will helpfully prompt you to automatically move those transactions to another category.
The simple 10-Category expense system I created has enabled me to track my spending each month without having to deal with the details of the typical software setup. My current expense categories in Quicken are:
1) Cash: Because I use a cash-only system with my wife, where an equal amount of money is taken out every week for expenses, this category includes everything from gas and groceries to my dog's food. A fixed weekly expense makes predicting my monthly totals extremely easy.
2) Charitable Contributions: Used for all of your cash charitable contributions.
3) Home: This category is used for the rent/mortgage payment, as well as any home improvements, home supplies, electronics, and anything else you purchase for the home.
4) Home Business Expense: Although I do not have a home business, I use this category to track my shipping and fee expenses for personal items I have sold through online auction sites.
5) Insurance: All insurance expenses are tracked here including homeowner's, renter's, car, health, dental, and specialty insurance.
6) Loan Service: Student loan interest and interest charged on car or mortgage loan can be tracked with this category. If you have credit card balances, it's also a good place to track interest charges from those debts.
7) Planned Expenses: These are all planned expenses for which I have saved money, including travel and special purchases. The idea is that this category is offset one-to-one with a transfer in from my savings account, thereby being budget-neutral.
8) Services: These are the items which we pay for monthly or quarterly, from Cable TV, telephone bills and utilities, to magazine subscriptions and music services. Having an Excel spreadsheet or other external document set up allows you to keep your individual items which comprise this category total separate. This enables you to make changes quickly if one of the items changes, yet keeps this mess outside of Quicken and out of mind.
9) Taxes: I place all my tax expenses in this category. Although this prevents me from using my Quicken information directly when I file for taxes, I like seeing my total tax burden in one category, and am much more likely to file using my W-2 forms anyway, rather than trusting a computer program.
10) Unplanned Expenses: This is by far my most useful category. Any expenses which I had not anticipated are tracked here. After a several months to a year, this category will give you a running average and a great idea as to how much money should be budgeted toward expenses that seem to "creep up" on you.
For income categories, I have found that keeping what arrives with Quicken is best, particularly when trying to estimate your taxes. However, I choose to make most of the income categories "hidden" so that they do not take up valuable time as I scroll through the list in the transaction register.
This simple, yet complete system allows you to quickly scan your finances and determine where your money is going without making your head spin. It has worked wonders to simply my financial tracking system, and I encourage you to try it for yourself. Just remember one simple question: "What do I need the software to tell me?"