How to Create a Personal Finance System for Money Success

If you’ve ever felt discouraged or upset about your financial life, you’re certainly not alone. Many people go through years, or even decades, of not earning enough, not spending wisely, or not having sufficient education to make the best money decisions.

The fact that you’re reading this article or listening to the companion Money Girl podcast means you know that your financial life could or should be better. Congratulations, that’s the first step to getting on the right track!

In many cases, financial problems arise when you don’t have an effective money system in place. In this article, I’ll cover a personal finance system that helps you make the most of what you already have, simplify your life, and create more success.

There are four overarching parts to a money system that keeps you informed, allows some flexibility, and supports your dreams, all at the same time.

1. Monitoring cash flow

The first part of your personal finance system should be finding the best way to monitor your cash flow. Understanding exactly how you earn, spend, and save is so important because it’s the foundation of your financial life. If you’re not sure how much money is coming in and going out, you won’t be able to manage it intentionally.

But getting your arms around cash flow isn’t always easy because it’s probably moving through multiple places. These may include a bank checking and savings, one or more credit cards, a retirement account, brokerage, college savings account, medical savings account, and more. To manage all these transactions properly without driving yourself to the brink of insanity, you need a way to centralize them.

The trick to watching and managing cash flow is to use a convenient digital tool that aggregates your entire financial life in one place. Here are some of my favorite money programs that make it easy to stay on top of your cash flow using your computer desktop or a mobile device.

Cash flow monitoring tools

Quicken has been around a long time and is considered the gold standard in personal finance software. It connects to multiple types of accounts, such as banks, credit cards, lenders, and investments, to aggregate your transactions. Once you enter the credentials you use to log into various financial sites, every time you open Quicken, it connects to them and pulls in your new transactions.

The Quicken Starter edition comes with automatic categorization, limited budget tracking, and a bill dashboard for $35 per year. Upgrading to the Deluxe ($50) or the Premier edition ($75) gives you the Starter features plus customizable budgeting, loan tracking, investment tracking and analysis, bill pay, and online backup.

You can use Quicken on a PC or Mac, but PC users can also get a Home & Business version for $100 per year. It helps you manage a small business or freelance work by separating personal and business expenses, emailing custom invoices with payment links, and tracking business tax deductions.

Once your financial transactions are imported into Quicken, you can categorize them using suggested or customized labels. The program quickly learns which categories to assign to different transactions, but you can always change it or split transactions between multiple categories.

Mint is owned by Intuit, the former owner of Quicken. It’s a free app that also connects your financial accounts, categorizes transactions, and displays an easy-to-read dashboard. It has a budgeting function, bill pay, alerts, and even gives you a free credit score.

The downside to most free financial apps is that you’ll see lots of ads. However, it’s a great tool if you’re just starting your digital personal finance system, or you want a free solution.

Google Sheets is another easy, free way to stay on top of your money. You can use formulas to add up rows or columns, create charts and graphs, and export data to a variety of popular formats, such as PDF. The problem with spreadsheets is that you have to enter your transactions by hand, which can be quite time-consuming if you have many of them.

However, you can automate the process by subscribing to Tiller, which connects to your financial institutions and aggregates transactions into Google Sheets. It offers several free templates, such as an expense tracker, a business spreadsheet, and a build-your-own spreadsheet. You can try it free for 30 days and then pay $59 per year.

As you review your transactions, be vigilant about categorizing them correctly so you’ll have accurate reporting. Seeing all your transactions organized by income and expense category – such as housing, food, transportation, insurance, and savings – gives you incredible insight into your spending habits, as well as your weak spots. That information may not be easy to face, but it can empower you to make necessary changes.

2. Setting financial priorities

Once you have a simple way to keep tabs on your cash flow, the next part of your personal finance system is to set and maintain priorities. After all, if you don’t have financial goals, your money is probably just going to get spent and not end up where it can serve you.

So, take some time to figure out what you want your future to be. What financial and non-financial dreams do you have? It’s okay if your ideas change over time.

And if you’re not sure what financial goals you should have, try a simple exercise. Imagine your life five years from now. Consider where you’re living and how you spend your time. In five years, what would you be proud to say that you had accomplished between now and then?

Stretch your imagination out further and do the same for your life in 10 or 20 years. Then imagine you’re on your deathbed with just a few hours left to live. What accomplishments would make you feel good about yourself even in your final hours?

These questions can give you essential information about yourself and inspire you. Without clear financial goals, it’s difficult to know what you’re making sacrifices for and working toward.

While everyone’s dreams are different, one goal you must set is to build retirement savings. Unless you have a large trust fund, inheritance, or pension coming, you’ll need more money to live on in retirement than the meager Social Security retirement benefits.

And if you’re self-employed, setting aside money that you’ll owe for a variety of taxes should be another priority, unless you want to get in serious trouble with the IRS. Other important goals include maintaining an emergency fund and substantially reducing or eliminating any high-interest debt you may owe. You might also want to save for your children’s education, make a down payment on a home, buy a vehicle, or start your own business.

To get started, download the free Financial Planning Workbook (PDF) and set aside some quiet time to complete it. Get your spouse or partner involved so you can create goals that align with the future you envision for yourself and your family.

Then incorporate your goals into your personal finance software or app by creating a budget. You set a maximum dollar amount or percentage of income for each spending category, such as food, transportation, debt, emergency savings, and retirement. The program shows you how your actual spending compares with your budgeted amounts over different periods.

Here’s a tip: If you don’t want to monitor your cash flow by many different categories, use the 50/30/20 method. This budgeting approach allows you to lump a variety of expenses into one of three categories: fixed expenses, variable expenses, and savings.

The idea is to spend 50% of your take-home pay on fixed expenses, such as housing, food, internet, insurance, and debt payments. These are your necessities and everyday living expenses.

You might spend 30% on variable expenses, such as dining out, entertainment, and clothes. These are nice to have, but not essential. And the remaining 20% would go toward retirement and emergency savings.

If the 50/30/20 method helps you create a simple budget and watch your cash flow more closely, it’s a win. Then you can refine your budget later on if you decide that you want to measure subcategories more carefully.

If you’re like me, with variable self-employment income, budgets can be challenging. You don’t know exactly how much money you’ll make from month-to-month as a typical employee does. You also have to save money to pay your income taxes every quarter.

I’ve mentioned in previous posts that I have a top-down approach to spending where I pay for my goals first and then live on the rest. However, creating a budget may be an important part of your personal finance system that gets you on track and keeps you there.

3. Automating your finances

In addition to monitoring your cash flow and spending consciously on priorities, automating your money is a key to success. Without it, you risk having your financial targets fall through the cracks.

Setting up automation for every possible part of your financial life is like having insurance that guarantees critical tasks will be completed on time. You’ll have less to think about and remember each month.

Here are some ways you can use automation for more financial success:

Centralize all your e-bills and automatically pay them online

You might use the bill pay feature offered by your bank or a personal finance program such as Quicken. This feature is one of the most overlooked but valuable personal finance tools. Having all your bills in one place makes the often-dreaded task of paying them much easier. Your payments are sent electronically, or by a paper check, so you can pay any company or individual with a mailing address. Most banking institutions guarantee that your payments will arrive on time and reimburse any late fees if they don’t.  I have e-bills sent to my USAA bill pay center, so I get notified about due dates, can set up payment dates far in advance, and choose specific accounts to deduct payments from. Centralizing bills inside your checking account allows you to see where your money is going and make sure you have enough to cover future payments. Just make sure to review your bills to make sure they’re accurate. You could also set up alerts when an e-bill is due and then manually initiate payment through your online bank account or tracking program.

Create recurring transfers between bank accounts

You can set up a variety of transfers that happen at a particular time or day. For instance, you can move money from your checking to one or more savings accounts designated for anything you like, such as emergency money, taxes, holiday spending, and vacations. This is the easiest way to pay yourself first according to your priorities.

Set up recurring external transfers

You can set up transfers to regularly move money from your checking to other financial institutions. These might include sending a percentage of your income to a self-employed retirement account, a health savings account, or a 529 college savings account.

Use sweep transfers

Some financial accounts allow you to set up sweeps, which automatically move amounts that exceed or fall short of a certain threshold at the end of the day. Typically, a sweep transfers excess cash into a higher interest-earning account. For instance, you could set up your HSA or business checking account to move balances over $1,000 into mutual funds.

Do more with direct payroll deposits

If you get a paycheck via electronic direct deposit, ask your employer to split it into multiple accounts. For instance, you could have a certain dollar amount or percentage sent to your emergency savings or home down payment savings account every payday.

Create recurring retirement account contributions

Workplace retirement plans, such as a 401(k) or 403(b), require contributions to be automatically deducted from your paychecks. For other accounts, such as an IRA, SEP-IRA, or solo 401(k), for individuals or the self-employed, you can set up contributions to automatically transfer from a bank or brokerage account.

Increase your retirement savings rate

Most retirement accounts give you the ability to increase the dollar amount or percentage you contribute automatically. Consider bumping up your savings rate by at least 1% every New Year until you max out one or more retirement accounts.

Use investment rebalancing

Once you chose investments in a retirement account, it can be challenging to maintain the same mix of stocks and bonds as their values change. However, most retirement accounts can automatically rebalance your investments. They can sell shares in a category that exceeds your chosen allocation and buy shares in another category where you’re deficient.

Use as many financial accounts for different purposes as you need to create the infrastructure of your financial life. I recommend that you avoid commingling funds because it blurs the lines and doesn’t allow you to be clear about the purpose of each dollar. At a minimum, you likely need a checking account, an emergency savings account, other savings accounts for various goals, and a retirement account.

If you’re self-employed, you likely need a business checking account and a business savings for taxes owned. You may also need a holding account, where your income goes until you transfer it to other accounts, such as your primary checking, savings, and one or more retirement accounts.

4. Making financial adjustments

The last part of a solid personal finance system is to review it regularly and make adjustments when needed. The best financial programs have a variety of reports and graphs that allow you to quickly see how you’re doing. You may need to reallocate your budget, cut expenses, or reprioritize to make sure you’re getting ahead.

Following these guidelines helps you protect your money from your propensity to spend it. Having a sound system makes it easier to be more efficient with the money you already have. The idea is to make sure that every dollar has a place and purpose based on your goals.