Organization 101

This is the mantra of Food Network star Alton Brown, but it applies to finances as much as food.
Organization will set you free.

You financial house should not only be in order in the monetary sense, it should be in order in the physical sense. Business receipts and bills don't belong in a pile in a shoe box. When tax time rolls around, you should be able to hand your tax preparer what he or she asks for in less than a minute.

Service providers are not perfect. Banks are not perfect. If something looks off on your gas bill, you should be able to pull up a full year's back bills and compare your usage levels to the bill you are questioning. You should have all of your ATM receipts ready and organized when your bank statement comes in, and you should reconcile your bank statement with your records every month. Many debit card based money thefts start with the theives stealing small amounts and then, if there's no reaction, they drain the account. If you have all your records and you reconcile your statements, you'll be able to catch the small amounts and alert your bank. If you try to reconcile your statement and you can't find your ATM records, you're going off memory, and that allows a lot more to slip through.

For the Small Business Owner
Don't, absolutely positively do not, keep your personal finances in the same place/container as your business finances. At all times, you should be able to pull your business financial paperwork out without touching a single personal bill or receipt. You do not want to be telling an IRS auditor that you included your daughter's ballet lessons as a business expense because you didn't have time to sort your bills.

Now, this doesn't mean you have to be absolutely anal and file everything the second it comes in, but you should have a system. Get an accordian file or a plastic filing case and label each section with a type of bill or statement and once a month or so file your various bills in their appropriate sections. One day sit down for five minutes and mark your calender for the entire year with the day big bills are due, like car and house payments. Put your tax paperwork for each year in one folder, clearly labeled, and keep all the folders together. Put bills to be paid in the same place every time they come in so you get in the habit of looking at the same spot every day to see what's due.

If you want to take it one step further, create a spreadsheet of bills and expenses for each month and record your expenses by category, such as food or utilities, and have a spot to put in your income after tax withholdings. Each month total your expenses to find out what you spent where and if you made enough to cover it. Do this for every month for a year and give yourself an idea of what you spend the most on, how much you save after spending, and where you need to make cuts in your spending. This will give you a good idea of what to budget and what to change for the next year.

Remember, organization will set you free.

The Financial Golden Rule

I probably should have started with this, but it's better said late than never.

This is the rule upon which good personal financial management is built. Following this rule helps get the rest of your financial house in line.

If you can't afford it, don't buy it.

With a few exceptions, which are really variations on this rule, you should never borrow money to buy stuff. Stuff is not as important as running water. Stuff is not as important as being able to pay your hospital bills if something happens.

If you have to ask yourself whether you should buy a new toy or pay your electricity bill, you should put that toy down. You can't afford it. You should not buy it. If you have a credit card maxed out you need to stop buying non-essential things. Because you can't afford them.

The exceptions to this Financial Golden Rule come in the form of large-item loans: Home mortgages, car loans. Getting a loan to buy a yacht you think you'll use every weekend does not count. If you can afford it, go ahead. If you can't, don't.

The Large-Item Loan
The sad fact of life is that most people in developed areas need a vehicle to get around. Many metropolitan areas are not safe to walk in, the distances are too great to make walking or biking feasible, and public transportation does not meet the everyday needs of a lot of people. So, a car becomes a necessary purchase. Housing is a basic necessity for life. If you are considering a loan to purchase either of these items, the variation on the Financial Golden Rule comes into play: If you can't afford the monthly payments, you can't afford it. And if you can't afford it, don't buy it. Not everyone can afford to pay cash for a car or a house. They can afford to put a, relatively, small amount of money towards the item each month. This is the purpose of a loan. Money now for small repayments plus interest over time.

If you can afford to pay $1200 a month in home loan payments and you have a choice between a home that would cause you to pay $1150 a month and a home that would cause you to pay $1500, you should buy the first home. You can afford $1150 a month. You shouldn't even consider the $1500. What are you going to do about the $300 you can't afford? Get another loan somewhere? It is the height of idiocy to put yourself into debt to pay off debt(the exception being shifting debt to a lower interest rate or more stable program). What about just paying the $1200 you can afford and ignoring the $300? Well, even if your lender allows you to get away with that, you're just hurting yourself in the long run. That's $300 a month that's not going towards paying off principal. That's principal that's still gathering interest. That's principal you're going to have to find a way to pay off when your loan comes due. Let's say the lender does allow you to only pay $1200 a month instead of $1500, but they're going to apply the $1200 a month you send them backwards so that they put $300 to the first month's bill and then apply the rest to the current month's bill. Here's how it would go for the first year.
Month 1: $1200
Month 2: $300(to month 1)/$900(to month 2)
Month 3: $600(to month2)/$600(to month 3)
Month 4:$900(to month 3)/$300(to month 4)
Month 5:$1200(to month 4)/$0 (to month 5)
Month 6:$1200(to month 5)/$0(to month 6)
Month 7:$300(to month 5)/$900(to month 6)
Month 8:$600(to month 6)/$600(to month 7)
Month 9:$900(to month 7)/$300(to month 8)
Month 10:$1200(to month 8)/$0(to month 9)
Month 11:$1200(to month 9)/$0(to month 10)
Month 12:$300(to month 9)/$900 (to month 10)
Not the kind of situation you want to be in.

Remember: If you can't afford it, don't buy it.