January is the month where I pull together financial information and think strategically about how I allocate time, and money.
One of the most useful tools for understanding what’s really happening… as opposed to what we think is happening, or what we budgeted to happen… is an operating account.
I’ll illustrate with a range of examples.
Cash movements matter.
If you’re going to get ruined, financially, then it will be due to running out of cash.
So, how to track the cash?
Family Joint Account — every dollar that runs through my household leaves via a single checking account.
Annually: I do a 12 month search on every credit entry into that account. Where did I get my cash?
Monthly: I check total outgoings in the account. How much did we burn this month?
This gives me an understanding of the big picture. While figuring out how to save 20c on a gallon of gas makes me happy (CostCo FTW)… gasoline could be free and it wouldn’t move the needle for my family spending.
Knowing the big numbers, keeps me from making my family miserable by distracting us with the little stuff.
House Account — From 2008 to 2012, we lived in a very big house.
Aside from the time spent taking care of the place (65 bags of leaves each October!!!), I was curious what this place actually cost me. So I opened a checking account, gave my wife a checkbook and took one for myself. Every-single-thing connected to the house went through there.
Monthly, check the out-goings. Boom, you know exactly what the asset is costing.
You can do this for RV, boats, second homes, you name it.
By the way, the real costs were time, emotion and opportunity cost. We fixed that in 2013.
Nanny Account – When the kids were little, we spend a ton on childcare. It was the best money we’ve spent since being married. Always remember to structure your childcare so it benefits the marriage.
Preschool, while part of childcare, is where I give consideration to what benefits the child. Everything else runs through the filter of strengthening the marriage.
Get a debit card for the account, run payroll and all other expenses through the account.
Making the cash easy to track saves many ethical mistakes.
Business Checking Accounts
#1 // When I was running my athletic coaching business, I had a habit of blowing cash that was in the company account. I’d use it for “business related expenses.” When there is a tax deduction, we can justify a lot of marginal spending.
To give myself better spending discipline, I set a target of paying MY WIFE’S account $5,000 a month.
Worked great. The year I started to focus on cash generation, the business saw a $100,000 swing in profitability.
#2 // These days, in my fiduciary services business, I have a brokerage account at Vanguard. Right now, the account invests in a money market fund (VMFXX). To see what the business is _really_ making, I check the account balance at December 31, 2021 vs a year prior.
The business has two checking accounts. I keep the minimum balance in those accounts for free checking, and sweep the excess to Vanguard. The Vanguard balance tells me how things are going.
#3 // I sit on the board of an investment company in Hong Kong. All operations related expenses flow through a single account. Monthly, quarterly, annually… we check the outflows against what we think the operation is costing us.
#1 // My kids have accounts with the Bank of Dad. These spreadsheets help me teach them the power of compounding (BoD pays 10% per annum).
The first entry into these accounts is October 2016. It’s been a useful teaching tool. I break out the “earnings” component of their weekly interest and they are amazed at the “free money” they earn from investing with me.
#2 // My own Dad lives outside the US and has me pay things from time to time, we have a simple spreadsheet we use to track (Item, Amount, Date, Reference).
We’ve been rolling it for three years. So, much better than when I used to run QuickBooks to track family spending outside my household. We check the total at the start/finish of the year and we know the cash outflow.
Rather than making myself miserable with (endless) low-value bookkeeping, I do a monthly review of every account where money can leave my life.
I enter the closing balances for everything. I compare account balances, and totals, to the prior period. One page.
I also run a monthly cash flow projection (March to February) so I remember to make lumpy payments. One more page.
- Federal / State / County Taxes
- Retirement account investments
- All of the above by legal entity, subsidiary and currency
When I create the forecast, I insert calendar reminders (7 days ahead) to make sure I haven’t swept the cash away.
I nearly bounced a payment to the IRS this month, so the system isn’t perfect but it’s better than jamming my head with dates and payments.
All of these systems let me quickly get a feel for the key numbers in my life. They let me know what’s happening with a minimal investment of time. With accounting, it is easy to spend hours (and hours, and hours) bookkeeping, while generating zero useful information.
The overall system quickly shows me when my expectations are out of whack with reality.