[edit: The content of this post is freely available for use in documentation under the GNU Free Documentation Licence. Thanks Sam for the suggestion.]
Why use personal finance software?
Using personal finances management software is a key part of getting in control of your spending, and getting out of debt. It's not enough on its own - you'll have to make lots of other small, incremental changes to your lifestyle and habits - but without it you're going to really struggle. It might be possible to use pen and paper, or a spreadsheet, but now that there's free software available that's been designed for this precise purpose, you'll be creating needless pain for yourself by choosing not to use it. That said though, what works for me may not work for everyone!
In the UK we're a bit stuck for good money management software - MS Money hasn't been updated since 2005, and Quicken no longer support the UK. There is Accountz, but having taken a quick look at the demo version I wasn't exactly overwhelmed, and wasn't prepared to pay for it until I'd considered the free option - the Open Source programme GnuCash.
Why use Open Source?
Open Source has lots of advantages, some of which make it the obvious choice for money management.
- It's free, so if you try it and it doesn't work out you're not going to have wasted any money
- It's not dependent on a company developing and maintaining the product - if you use Open Source, you won't be let down in the same way that UK customers of Microsoft and Quicken have been
- There will be lots of other people using the software around the world, and as it gets better more and more people will use it - so there will always be someone to help if you have questions or problems
- The development community will be happy to help or point you in the right direction, or take suggestions for new features for future releases
As a long-term fan of Open Source, I thought I'd give GnuCash a try and I've been pleasantly surprised. Once you understand its principles, it seems to work well, and setting up your accounts is very easy. It will integrate fully with online banking downloads (OFX is most common) and has plenty of powerful features to help you see where you're spending your money and whether you're sticking to your budget... you have a budget, right?
There are five steps to managing your money using GnuCash.
The first three are about setting it up, the latter two are about keeping it up-to-date. In the next post, I'll talk about how to get the most out of GnuCash, but for now we'll focus on setting it up.
The five steps are:
2. Download and install GnuCash (quick and easy)
3. Set up your accounts structure in GnuCash & populate initial values for assets and liabilities
4. For the next two weeks, use your debit card where possible but keep receipts for ATM withdrawals and for ALL cash purchases
5. In two weeks time, import all debit card payments from online banking and enter cash payments / withdrawals
Before you start you'll need:
- an hour of free time
- online banking set up with your bank
- a current account (ideally one with a debit card) that will allow you to download OFX files
- internet connection
- computer / laptop, or somewhere safe to store your personal files
- notepaper, pen
1. Plan your accounts structure and categorise your spending
This is where you will need to use your brain the most, but once it's done it'll help you a lot with everything else you do next.
Using a blank sheet of paper, make a list of your:
- liabilities: money you owe to others, typically credit cards, store cards, personal loans, informal borrowing, etc. Strictly, a mortgage should go in here, but for the sake of simplicity we'll leave it out for now.
- income: for people who have regular income, this will simply be the net number on the payslip, but might be your loan payments, pension, etc. ALL money you receive.
- expenses: categories of ALL the things you spend money on. My first pass looked something like:
Rent inc bills
Repayments
-Grad loan
-Credit card payments
Subsistence
-Groceries
-Restaurants
-Coffee / snacks
-Drinks
Travel
-London
-National
Health
-Contact lenses
-Treatments
-Dentist
Laundry
-Dry-cleaning
-Laundrette
Clothing
Hobbies
-Photography
-Books
-Music
Holidays / International Travel
Web / software
Toiletries
Gifts
Telecoms
-Broadband
-Mobile
-Landline
I'm sure that everyone's list will be different, but this doesn't matter as long as:
- Categories make sense to you
- You cover everything you need
- You aren't counting anything twice!
At this point you need to use online banking (or phone calls to credit card companies, or whatever) to find the balances of ALL your accounts - current accounts, savings, credit cards and store cards, etc.
EVERYTHING... :-)
This might take a few minutes but you definitely need to do it before you go any further.
2. Download and install GnuCash
The GnuCash website will allow you to download the most recent stable version of the software (currently 2.2.8). You'll be directed to a SourceForge download page - make sure you choose the Windows EXE file.
The EXE file is a standard installer which will take you through the installation. Use the default values, and once you're done, run GnuCash.
As you don't have any accounts file set up yet, you'll need to set up a new 'blank' set of accounts. I chose my currency (GBP) and used the 'Common accounts' default account structure - you'll modify this in the next step.
3. Set up your accounts structure in GnuCash and populate initial values for assets and liabilities
This is simply a case of replicating the lists you made in step 1 in GnuCash. It's very easy, simply start with the 'Common Accounts' structure you chose at the start, and use the buttons at the top of the screen to add, delete, and edit accounts.
Note that you will need to enter an Opening Balance for each account - you can either do that when creating a new account - it's one of the pieces of input data - or by entering a 'Transfer' in the account's register:
- From the main screen, double click on the account you want to set the opening balance for
- In the 'Description' column, type 'Opening Balance', then tab to the 'Transfer' column
- You need to select the category 'Equity:Opening Balances', then tab to the 'Receive' column and enter the amount of your balance
- If you're overdrawn, enter the number as a negative (i.e. with minus sign in front)
- Tab until you're onto the next row, and your opening balance should be recorded
- Save (Ctrl-S)
Note that GnuCash uses the term 'accounts' for both real accounts (like your current account) and for what I've termed spending categories (like 'clothing').
TIP: I found it easier to delete the Assets accounts and start from scratch than to modify the existing ones it gives you.
CONGRATULATIONS - you're done for now.
You might be interested to look at your Net Worth: your Assets and Liabilities added together. For me it's a big negative number :-)
4. For the next two weeks, use your debit card where possible but keep receipts for ATM withdrawals and for ALL cash purchases
This shouldn't be too difficult - simply make sure that wherever you can, you use your debit card to pay for anything you buy, and where you can't, you ask for a receipt when paying with cash. Also keep track of any cash withdrawals you make - simply keep the receipt in the same place as the cash receipts.
Once you get in the habit of asking for a receipt, it should be quite easy to place them in your wallet or purse and in two weeks time you'll have all the information you need for step 5 in one place...
5. In two weeks time, import all debit card payments from online banking and enter cash payments / withdrawals
In two weeks time, you'll have accumulated a pile of receipts for cash purchases and withdrawals.
Well done - you can now move to the final step in your money management process: downloading an OFX file from your current account using online banking. This will show all of the transactions that have happened in the past week - debit card spending, direct debit payments, income, interest payments, cheques cashed, etc.
Obtaining an OFX file is normally quite easy - the link to allow you download one will usually be somewhere near the 'Statements' area on your online banking website. You will need to download a file containing all of the transactions since you set up the account structure in GnuCash two weeks before. Ideally, the website will give you the option of downloading all transactions between two dates, but if not, get more than you need and remove unwanted transactions during the import process.
Armed with the OFX file, you can import the transactions to the corresponding account in GnuCash. The steps to do this are:
- On the menu bar, click File --> Import --> OXF/QFX...
- In the pop-up dialog box, find and open the OFX file you downloaded
- The next step is to select which account the OFX file corresponds to (this will be your current account, within Assets)
- The next window shows a list of all of the transactions you're about to import, and allows you to uncheck transactions you don't want to import, for example if the OFX file contains items outside of the date range you're interested in (as mentioned above). Normally, this won't be necessary - just click OK
Now all of the transactions have been added to your current account - you just need to go in and categorise them:
- Open the register page for your current account (where you just imported your transactions) by double clicking on the account in the main window.
- In the 'transfer' column, all of the entries (which would normally show the corresponding account for which the transfer has been made or received) will say something like 'Imbalance-GBP' (or 'Imbalance-USD' if you're using dollars).
- You now need to tab through all of the lines and change the Transfer data to the correct expenses sub-account, so that, for example, your Switch card payment for a sandwich is reflected in the Expenses:Dining sub-account.
- The first time you change the data in the Transfer column you'll get a window pop up and ask you if you're sure you want to do this. This time, you do, so select the lower checkbox ('Remember my answer and don't ask me again THIS SESSION') otherwise it'll do it for every item you change and click 'Record Changes'.
- To speed things up, make sure you use the tab key, and type to select expenses using GnuCash's autoselect feature. For example, for the 'Expenses:Groceries' sub-account, you could just type 'Ex:Gr' and the autoselect would get the right one without you having to type the whole lot.
Now all you need to do is add the cash transactions and you're done.
- Open your 'cash in wallet' account and enter each of the cash purchases one by one - each one will take a single line in the 'register', and you will need to indicate which of the expenses accounts the money went to.
- It's exactly the same as what you've done with the OFX import, but you have to enter the transaction description, date, and amount, as well as the corresponding expense sub-account.
If there are any other accounts you need to update (eg credit card spending) then repeat the same process, either using OFX or manual transaction entry.
Once you've finished, congratulations again! You're done for now. Make sure you've saved your GnuCash data file somewhere safe.
On the main accounts screen, you'll be able to see a summary of your spending in each expenses sub-account during the last 2 weeks, as well as an updated view of your net worth. This might be enlightening!
What next?
Return in a week, when I'll describe some of the powerful features in GnuCash which will help you see where your money is going, take corrective action if necessary, and get in control of your personal finances.
Good luck! I hope that this tutorial has been useful :-)
