Personal Bookkeeping with GnuCash
Managing your private finances with a business grade double entry bookkeeping software sounds like a bit of overkill to you? Maybe you should give it a try and see if you can make bookkeeping a habit and get overview and insights into your spending habits, asset structure, insurance contracts and income.
Your household budget it bigger than you think
Think about how much money you make. Did you ever wonder where it all went? Maybe you have a family, a house, some savings for retirement, a college fund for your kids, you have recurring payments, some passive income.
Just make a list. Some small businesses have less revenue to keep track of than your household.
Only for tax purposes?
Many people think bookkeeping if for making your tax authorities happy. That's not it's main purpose. Your books are for your information.
Double entry accounting
The principles of double entry bookkeeping are effective and time proven. The principle of balance demands for every change in value in one account you need to have a balancing change in another account.
A proper ledger software forces you to think about every single transaction. I use GnuCash. Like all powerful tools it has a learning curve but it's well worth it. The money I saved and the booking errors I uncovered paid for the time I pondered over the tutorial.
But I only want one account
At first I found it very annoying that I needed to have balancing entries all the time. All I wanted was a software to track the family bank account. Not those stupid offset accounts. GnuCash encourages you to assign accounts and in doing so, taught me some valuable lessons.
I started the account and entered the starting balance. There was my first problem. Where did that money come from? Well from the previous year of course. Entering that source of the money, I made a note in OmniFocus to import the previous entries later, which I later did.
At first I imported the current year's bank account entries from a file I created with my old banking software ProfiCash. The first one was an utility payment for electricity. The template has an account for that.
Cash in your pocket
Next in my bank account is an ATM cash withdrawal. My first thought was to create a generic account called "cash expenses". Then I thought about it. Wouldn't it be cool to have an asset account called "wallet" and then book the cash expenses?
So I created a wallet account for myself and another one for my wife. I talked to her and we started collecting our receipts. Once in a while we sit down and count the money in the wallet and compare it to the calculated value and use GnuCash's reconciliation feature. Of course we sometimes spend money and forget about the receipt. Reconciling the account, we create an entry and put that difference into a separate expense account.
Next in my bank account, I come across a payment to a retirement fund. OK. That's another asset I have to create an account for. The fund sends annual reports telling us about the current balance. That is sometimes higher or lower than the accumulated payments. I need an income account for the interest income.
Then a mortgage payment, so I have to create the liability account. That account has monthly interest rates. So I need that expense account. There is a nice feature to schedule recurring entries in GnuCash.
The credit card payment is not an expense by itself. Instead there is a credit card account on the liability side of my balance sheet. Sending a payment to that account reduces the money I owe the credit card company.
Payment method does not matter
Suddenly it does not really matter by what means I pay for my stuff. Cash, debit card, credit card, paypal account, you name it. You target the expense account and there you see the total for each category.
Building a house
After importing the current year, I continued and imported even older entries. Years before, we have built a home. All the payments went into asset and expense accounts. Suddenly I have a total of the house asset.
How about recurring depreciation entries? They are not for tax purposes.
You can even link entries to a file on your harddrive. If you have a pdf-invoice or a picture, you can open that by clicking on the entry. This is very handy if you want to buy stuff again or have warranty claim.
Evolving into a complete system
Slowly but surely the principles of proper accounting force you to create a system for your assets, liabilities, insurances, incomes, etc. The tree structure of sub accounts makes it easy to get sub totals and have an overview.
Making errors obvious
You will be surprised what you discover.
I have to admit that this bookkeeping made me realize that two separate insurance companies have debited my bank account for the exact same service. Upon further investigation I realized that one was already cancelled and they simply kept taking money out of my bank account. I called them up and they corrected the error by giving me several hundred Euros.
Another error I found was a utility company and a life insurance mistake. All in all I got more than a thousand Euros for booking a time period of about 10 years.
The errors become extremely obvious when the accounts don't balance out.
Some expense accounts have higher balances than you'd have guessed. My family was surprised to learn how much money we spend on groceries and take away food. When I started this ledger I explained that it's not about being frugal but about transparency. It's okay to spend money, but we have to do it knowingly. Of course the awareness makes saving money easier.
Replacement for many spreadsheets
After using GnuCash for years, it has become a replacement for many spreadsheets I have kept. One example is our health insurance. I collect invoices from hospital, doctors, receipts from the pharmacy for each person in the household. At the end of the year I add them up. If the sum is higher than the co-payment, I get a refund from the insurance for the excess amount. An excel spreadsheet worked fine, but it was always an extra step to open that document. If I forgot to enter a line, it costs me money.
Now, booking the health payments, I have to assign the offset account which should be balanced at the end of the year.
Other spreadsheet are insurances, payments for the health insurance of our cleaning lady, etc.