A weakness in many budgets that allows money to be lost is the failure to track cash.  Adding the ability to track cash in Quicken (and other tools) is easy to setup and quite useful.

Why Should You Track Cash?

Cash purchases may be hiding an inefficiency in the way you spend your money.  Without visibility into where your cash is going, you might not realize the wasteful nature a particular spending habit.  Tracking all of your other spending down to the penny may be for naught if your cash slush fund is where the waste in your spending can be found.  I used to have a category in my budget for “Cash Withdrawals.” I used that category for withdrawals from the ATM.  In reality, the cash should have been allocated to the category it was used for.  My old system basically allowed my cash to be uncategorized spending.  I may have appeared to be following my budget for Dining Out, for example, but if I was using cash to pay for lunch, I might have actually been over budget.  To solve that problem, I setup a cash account in Quicken.

Cash Account Setup

These instructions are for Quicken,  but similar features exist in almost all budgeting software.  Skip to the next section if you are using an alternative.

• The Accounts Window normally appears on the left-hand side of Quicken.  Select “Add Account” from the bottom of that window.  Alternatively, press Ctrl-A to open the Account List, then Choose “Add Account.”
• Choose the option to indicate that “This account is not held at a financial institution”
• For the Account Type, choose “Cash” from the list of Cash Flow Accounts
• Name your account something like “Cash Account”
• Enter today’s date and the amount of cash you currently have on hand as the Starting Balance
• That’s it!

Using Your Cash Account

From now on, categorize cash withdrawals as transfers to your new cash account.  So if you take $20 from your checking account at the ATM, you would record it as a transfer from Checking to Cash Account.  This would cause your checking balance to go down by $20 and your Cash Account to go up by $20.  When you use cash, save the receipt or record the amount in a notepad.  When you return home, enter the purchase as a withdrawal from your cash account, using the appropriate category.   At the end of each week, I like to compare the balance in my cash account with the cash I still have left.  You can reconcile the difference by entering any purchases not previously recorded.  Any remaining discrepencies may be attributed to the change you left in your car, threw in your coin jar, etc.  You can either use an Uncategorized Expense or estimate where the money probably went to best categorize the difference.  You could even create a seperate cash account for your coin jar, car change holder (or couch cushions) if you wanted to be totally thorough.

Tracking your cash in your budget will allow you to better categorize your spending.  You should also have a good sense of how much money should be in your wallet or purse just by looking at your computer.  Once you get good at tracking your cash, you should finally be able to allocate your spending down to that last penny.  This may be too much detail for some budgeters, but gives the rest of us the visibility we’ve been looking for.