It’s only the middle of February but my business taxes for 2016 have been completed and filed. My personal taxes are in progress.
Granted, I use an accountant who completes all the complex forms for me; all I have to do is gather up all the necessary information and drop it off at her office.
Even so, this year has been relatively stress-free in terms of reconciling accounts, fixing errors, gathering up supporting documents etc. I attribute this ease to the fact that over the last two years, I’ve built some really good systems for keeping my finances tidy.
It didn’t used to be this way, however.
In fact, my financial systems were such a mess that one year, I made a huge error, which I discovered after my accountant had filed my business tax form with the Feds. The error meant I had to redo my W2/W3, and submit my corrected forms; my accountant then had to resubmit my corrected tax form. Ouch!
Reasons why finances become untidy
One of the big reasons finances can become untidy, at least in my opinion, is because everything is electronic now. It used to be you received a paper bill and you paid it with a paper check.
Whenever I paid a bill, I’d write on the bill, “Paid,” the check number, and the date, and file the invoice in its proper file folder.
Then each month I’d received a paper statement from the bank, which I used to reconcile my bank account. Once I reconciled it, I’d note the date and file the statement.
These days, I pay just about everything electronically. I receive very few paper bills in the mail as companies now send me statement reminders via email.
And, with today’s bank feeds, you can have your transactions automatically downloaded into your accounting software — so your account is always up to date.
In theory it all sounds smooth and glitch-free, but it’s not. Why?
With accounts always “up to date” due to automatic feeds, it’s easy to “forget” to reconcile accounts, including bank, credit cards and loans. When this happens, you miss mistakes, duplicate payments or heaven forbid, fraudulent charges — the small ones, not the big ones.
It’s also so, so easy to make impulse purchases. This is especially true for all those “micro” amounts of money. For some reason, we’ll pause at a $49 charge, but will instantly click the “buy” button for $1.99, $5.99 or $9.99.
And since the amount is so small, we forget about it — which can compound a bad situation if you’re neglecting to reconcile your accounts each month.
Another reason things can go awry is because many of us still use a hybrid paper / electronic system. Although I pay everything electronically, I still print out all the payment notices, the statements, and the email reminders that my account has been charged. I then file all these pieces of paper just the way I’ve done for years.
But! I also have folders on my hard drive where I store some items. Having this hybrid system has lead to mistakes in the past.
Strategies for keeping your finances tidy
1. Reconcile your accounts every single month.
I’ve made it a habit to do this as soon as an account statement is ready — especially my personal and business cash bank accounts. I want to be sure both are up to date in my accounting software and that everything balances out.
Why? I like to know, to the penny, how much cash I have because this is how I manage my cash flow day-to-day.
The minute I lose the precise knowledge of my cash balance is the minute when things start to get messy. Trust me, the bank doesn’t see a difference between being short .02 cents or $20 — it will still ding you a $25 – $35 NSF charge.
I also reconcile my credit card accounts and match up all the charges (all those email reminders I printed out!) with the statement. I then staple everything together and file the statement in a file folder for that specific account.
When you don’t reconcile your accounts, “vagueness” sets in. You start living off your account balance versus your budget. You forget what charges are coming due and when. You spend more than think you have. This is how “debt creep” happens.
2. Know ALL of your reoccurring charges.
Because it’s so easy to sign on for things and have your account debited, it’s also easy to lose track of these reoccurring charges over time — with all the “small” amounts adding up to one large amount that can really wreck havoc with your cash flow or credit card balance.
I dealt with this type of “charge creep” in two steps:
First, I went through all the things for which I was being charged and made a list. I then asked myself if I needed the thing for which I was paying. If the answer was no, I got rid of it.
I then went back through the list to see if I could consolidate or reduce charges. My gym, for example was charging me $49 a month, which gave me the option of visiting any of their gym locations. However, I never did that. So I had the fee reduced to $29 a month for access to one gym location only — a cool savings of $20 a month!
Second, I started training myself to not click that “buy” or “free trial” button. The other day, for example, I almost bought a book I’ve been wanting to read for months now. Instead of buying it, I went to my library and put in an Interlibrary Loan request.
Third, I use You Need a Budget. In my budget I have each reoccurring charge listed, the amount, and the date for when each one hits my account. This way, no surprises.
3. Set up systems that work for you.
I personally like my paper filing system and will keep it because it works for me. I’ve learned over the past few years to not let paper pile up on my filing cabinet and to file things promptly — otherwise I spend hours searching for that one receipt.
Whether you create a paper or electronic system, the important thing is to have one that works for you and be diligent about maintaining it. It should be easy to find tax information, receipts, invoices, etc. for all your business (and personal) expenses.
If you find yourself scrambling for something, then you have a glitch in the system that needs to be fixed.
If you like this cash flow hack, I have lots of others in my guide, Cash Flow for Freelancers. In it, you’ll find all kinds of strategies for better managing the freelancer variable cash flow challenge.