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Creating an Income and Expense Tracking Document

Okay, you've got all of your receipts. Now what do you do with them?

Even if you use software such as Quicken by Intuit or Microsoft Money, you might find it helpful to keep a separate income and expense tracking document. You can run reports in your money management program that show you how you're doing with your financial goals, but the act of hand-writing or keying in the figures in a separate document can help you see the big picture more easily. I use QuickBooks (the business version of Quicken) to record all my transactions and balance all of my accounts electronically, but I also use another spreadsheet to list all of the data I want to see together, not all of which has a place in QuickBooks where it can be entered. I've tried to create just the right custom report in QuickBooks to eliminate the need for this spreadsheet, but so far nothing has worked as well as my trusty Excel document.

You can create your spreadsheet by hand on graph paper, in a ledger book purchased from an office supply store, or on the computer using a database program such as Microsoft Excel or Access (or even a word-processing program that allows you to create tables, such as Microsoft Word). A database program has the capability to perform calculations for you – a time-saving advantage if you know the program well enough to set the formulas.

You'll need list

• Either paper and a pen or pencil (for a hand-drawn spreadsheet) or software (Excel, another database program, or a word-processing program) for a computer-based spreadsheet.
• The receipts you collected in the previous section.

Laying the Foundation
There are a few components your spreadsheet will need to have, no matter how you create it. These are

• An Income section and an Expenses section
• Categories for subdividing expenses, and also for income if you receive payments from more than one source
• Regularly recurring time increments, whether monthly, weekly, or quarterly
• Spaces for both anticipated and actual amounts
• Spaces for total income and total expenses by time period

Below is an example of an income and expense tracking document that incorporates all these elements in a space-efficient manner. I created this one in Microsoft Excel, my first choice because I can change it at will, insert or delete lines, attach embedded notes to each field, and have the program automatically perform calculations for me. I can also make the spreadsheet as large as I want because I work on the computer, not on a printout that's limited by the size of the paper.

Choosing Your Time Increments
When you set up your tracking document, you will need to decide whether you will measure time in months, weeks, quarters, or another increment. Because most recurring bills are paid on a monthly basis, it makes sense to use one-month increments in your tracking document. For items that are paid less frequently (for example, if your water bill is quarterly), you can simply enter them in the months they are paid and leave the other months blank.

Choosing Your Page Size
A complete tracking document for an entire year will have 49 columns (1 column to list income sources and expense categories, followed by 4 columns for each month) and enough rows to list all your income, expenses, and totals. If you're using pencil and paper or a word-processing program, you can list 1-3 months per page; in an electronic spreadsheet program, you can list the entire year in one document.

Creating the Header Row and Category Column
In the top row of your tracking document, skip the first column and then divide the remaining 48 columns into groups of 4. You will use these 4 columns for each month: Expected Date, Expected Amount, Actual Date, and Actual Amount. These columns will serve slightly different purposes in the income and expense sections, so create them all, even if you feel you don't need all 4 in one of the sections.

Setting Up the Income Section
When setting up the Income section, consult a calendar to determine how many weeks or pay periods will fall in each month; then make a line for each payment you will receive. For example, if you are paid on the first and third Friday of each month, you'll have two lines per month to record your income. If you are paid every Friday, however, the number of pay periods changes from month to month.

If you are self-employed or your pay is project-based, you're probably rolling your eyes and thinking, "I can't project my income!" Believe me, I feel your pain. You might not be able to plug in a salary figure for the next 12 months, but you can anticipate at least a short distance into the future. Projecting income is one of the inherent challenges of being your own boss.

Laying out your projected income for an entire year won't be an option for you, but anticipating even just a month or two ahead and monitoring how close your Estimated Amount comes to matching your Actual Amount will make your financial life more predictable and less scary.

Make a line for each project you are hired for at the time you accept it and enter the amount it will pay in the month you expect to receive that payment. Don't worry about getting the amount exactly right: Remember that you have a column for Estimated Amount (your best guess right now) and another column for Actual Amount (the amount you enter when you have the payment in hand).

In the Expected Date column for each month, record the date on which you anticipate receiving a payment. If you have a regularly recurring salary or your company issues paychecks on the same day each week, this will be easy: Just consult the calendar. If your pay is project-based, use your judgment and past experience with each client to determine a reasonable date to expect payment – for example, 30 days after invoicing.

In the Expected Amount column, record the payment you anticipate. Again, if you are paid by salary, this will be simple. If you are hourly and work a varying number of hours each week, enter an average amount based on your recent work schedules; then update the figure when you receive your schedule for the upcoming pay period. For project work, enter the amount you will be billing for each project.

In the Actual Date and Actual Amount columns, record the actual figures when they occur. Seeing the estimated versus actual dates and amounts will be informative in the future: You'll be able to see how well you estimate and how predictable your income actually is.

Setting Up the Expenses Section
For most people, income doesn't need to be subdivided into categories because it comes from only one source. If you receive income from several sources and want to track each of them, you simply create a line for each in the Income section. If you share your finances with someone else, record his or her income in the same way.

However, detailed expense categories are important for everyone: This action allows you to see more clearly where your money is going, which makes this document very illuminating if you need to tighten your budget.

It's important to put some thought into these categories upfront. If you use money management software, you might have already done this; if so, be consistent and use the same categories in this spreadsheet. If not, you'll create categories now that you can later replicate in Quicken or Money if you choose to use software.

Categorizing Expenses
There are many metaphors and technical terms to describe the process of categorizing and subcategorizing data. Some people picture a set of nesting dolls – the ones that open at the middle to reveal a smaller doll inside. Others picture the branches of a tree, with the trunk representing the entire set, the main limbs as the broad categories, and the smaller branches as the subcategories. Some think of it as resembling an outline or a set of steps. For some, the term concatenation or chart of accounts says it all. Use whatever terminology or mental imagery works for you.

In the spreadsheet, you saw just a few basic expense categories and subcategories. You can have as many levels of subcategorization as you want, but keep in mind that the more detailed your system is, the more work it will be to maintain it and the harder it will be to remember what you were doing if you're away from it for a few days or weeks. Try to choose a level of detail that provides just as much information as you need and no more.

For example, take utility bills. You could use one category for all of them: Have one line labeled Utilities and group all payments for electricity, gas, water, and so on into that single category. Or you could have separate lines for each. Can you think of a reason that you might need to see those figures separately and wouldn't want to pull out the bills to check them? If yes, list them separately; if no, keep it simple and go with the single, general category.

The last section of categories you should include in your expense-tracking document is Purchases. Purchases are distinct from Bills in that the expense occurs when you go out and spend money; it's not a bill representing a financial commitment you've already made. You can include this section if you want to track all of your spending in this spreadsheet, or you can use this sheet just for bills.

Don't worry about making your Expense categories perfect: You can always make changes later. Remember, every good organizing system must have the capacity to change with your needs – you're not wedded to it for life. You can add, delete, or change categories and subcategories whenever you want or need to.

Tip
If you're having trouble deciding which of two things should be the main category and which should be the subcategory, for example Insurance versus Auto Expenses, ask yourself which category is "bigger" to you. Would you make the Auto Insurance file a subset of Auto, or would you make Auto Insurance a subset of Insurance? In other words, would it make more sense to group all insurances together with subcategories of Auto, Health, Life, and Homeowner's, or to group all auto expenses together with subcategories including Insurance and Maintenance? Figure out which is the "bigger" or main category in your mind, and therefore which should be its subcategories.

Recording the Expected Dates and Amounts of Expenses
You have several options for how you will handle the Expected Date column in the Expenses section. No matter which option you choose, the most important thing is to apply it consistently. You can use the Expected Date column to note the following:

• The date each bill is due – This is usually the most informative data for this column.
• The date you expect to receive each bill – If you pay your bills as soon as they arrive, this might be the most useful date to record.
• The date you intend to pay each bill – If you don't pay each bill upon receipt but you want to be prompted to pay it a few days before it's due, or if you have some bills you intentionally pay after the due date but within the grace period, such as a mortgage or property taxes, this might be the best option for you. If this date will fall outside the month you're listing the item in, be sure to include the month (not just the day) in this field.

In the Expected Amount column, record the amount you intend to pay. Again, you have several options:

• The actual amount due – This is simply the amount you're being billed for.
• More than the amount due – If you pay more than the minimum toward your mortgage or credit cards, you can record an amount larger than what's actually owed for this billing cycle.
• Less than the amount due – If you're facing a month of more expenses than income, you can use this column to plan which bills will receive partial payment.

In the Actual Date and Actual Amount columns, record the actual figures when they occur.

Seeing the Big Picture
After you've filled in all of your categories and data, total your expected income and expenses and – deep breath – see which is greater. This is your spreadsheet's reason for being, and it's also the most gut-wrenching part of the whole process. As you can see in the spreadsheet, Sue and Joe's expenses were much less than their income in January, but February is going to present a problem....

Congratulations! You've completed a major step toward organizing your finances. Now maintain this spreadsheet as you continue with the rest of the projects in this book, and keep refining it as you move into your increasingly organized future.

But what if you're not the only one manipulating the money in your accounts? Here's your final project for this chapter: learning to cooperate with your joint-account partners.