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How to control your money

The first step in gaining control of your finances is to set up a simple system for controlling your spending and identifying where the money goes. Robert Allen author of Multiple Streams of Income calls this measuring Streams and Leaks.

Most people have one main stream of income – their job. This income flows into their financial lake, but the lake has leaks from where the money flows out through them.

The key to taking control of your money is to increase the number of sources that flow into your financial lake and understand where the leaks are occuring, so you can do something about them.

If you use a personal finance system such as Quicken or Excel you can organise your expenses into these 10 categories.

  1. Giving
  2. Self
  3. Taxes
  4. Home
  5. Household Expenses
  6. Car and travel
  7. Fun and entertainment
  8. Insurance
  9. Debt/other
  10. Business expenses

1. Giving

This represents your contributions to charities or maintenance payments.

2. Self

In the classic book The Richest Man in Babylon – George Clayson tells that you should always ‘pay yourself’ first. Rather than as most people do and pay themselves from what’s left over. Frequently, if there’s nothing left over they don’t save. Wealthy people save first and live on what’s left over.

3. Taxes

Speaks for itself. It’s what you pay the taxman!

4. Home

This represents the costs of keeping the roof over your head. Being the rent or mortgage payments.

5. Household expenses

This covers the normal household expenses of living in your home and includes, food, electricity, gas, water etc.

6. Car and travel

This covers all aspects of transportation (rail, taxis, bus fares) and includes fuel, maintenance and car repayments.

7. Fun and entertainment

Covers all aspects of going out, renting a film, buying presents etc.

8. Insurance

This covers all insuranace, life, critical illness, pension plans etc.

9. Debt/Miscellaneous

This is the repayment of debts including loans and credit cards and any other costs which don’t fit above.

10. Business expenses

Costs associated with your business or employment. (Important to note as they may be recoverable from your business or your employer).

You only spend money a few times a day = so take a few moments each time you do to ask for a receipt then think about which category it belongs and write the number on the receipt.

That way, at the end of the day you can empty your purse or wallet and put each receipt into it’s appropriate file.

At the end of each week or month, simply total up all the receipts for each category.

Is there any opportunities to save money which immediately leaps out for ideas? – see 50 ways to save £50 per month

Money Management Steps

From now on, every time you spend some money, take a few minutes and do the following:

  1. Plan your purchase (where are you going to get it from – is it the cheapest place)
  2. Ask for a discount
  3. Ask for a receipt
  4. Check the reciept (and report errors immediately)
  5. Categorise the receipt
  6. Total the categories
  7. Review the categories – what action steps do you take for next month?
  8. file the receipts

For more information read Rich Dad Poor Dad.