Ever since I started my first business 12 years ago, I’ve been using double-entry bookkeeping, not only for my business, but for my own personal finances as well.
A lot of people ask me why I use double-entry bookkeeping for my personal finances when it’s not required by law. The idea of doing so may sound daunting, but actually it doesn’t require more time than doing single-entry bookkeeping, and the benefits are numerous. Here are some of the benefits.
See the true picture of your financial position.
Just knowing the balance of your bank account doesn’t tell you your net worth without taking into accounts all of your debts like credit cards, student loan, taxes payable, mortgage, etc. If you use double-entry accounting software, calculating your net worth is as easy as clicking a button to general a balance sheet.
Monitor your investment risk exposure.
When you compare your net worth to the total money you invest into stocks, bonds, mutual funds, and your own business, and compare it to your net worth, what is the percentage? If the ratio of your investment / net worth is close to 100%, maybe it’s better to convert some of your securities to cash so that you have sufficient buffers to protect your daily life when the market crashes or you face layoffs.
Manage expense reimbursement.
Keep track of how much money you spend on behalf of your company so that you can easily reconcile expense reimbursements. Since such transactions are not your personal expenses, you can use asset/liability accounts to manage them, rather than expense accounts.
Improve your business/accounting skills.
Understanding accounting is one of the most important skills to have as a business person. By using double-entry accounting for your personal finances on a daily basis, you can obtain basic accounting skills even if you don’t work in the accounting department of your company. After you get used to using the income statement and balance sheet to manage your personal finances, reading and understanding a company’s financial statements becomes much easier.
It’s sort of like treating yourself as a business. If you care about the financials of your own business or the company you work for, there is no reason you shouldn’t pay the same amount of care to your personal finances. Please give double-entry bookkeeping for personal finances a try as it will definitely help you manage the business of yourself better.