Take control of your personal finances

There are two popular approaches to managing household and personal finances and setting budgets. Plan A: keep spending and only stop when they cut up your credit card in the store. To be truly effective, this system requires that you transfer bank statements, bills and any other official-looking post straight to the bin as they drop through the letterbox.

Plan B is to obsessively track every purchase, down to things like bus tickets, in a portable account book and painstakingly reconcile these with your bank statement when it comes in.

There has to be a better way and fortunately there is. Your computer is far better at maths than you are and in the shape of money-management applications such as Microsoft Money and Intuit Quicken, you have a refreshingly easy way to track spending, loans, paying bills, creating and sticking to a budget and even synchronising with online banking.

Both Money and Quicken can perform a great variety of tasks, including logging Air Miles to creating a will. While this is certainly clever it's hardly integral to managing day-to-day finances and that's what we are going to concentrate on in this feature.

Our plan is threefold: to get your day-to-day spending logged and under control; to build a budget and put you in control of your monthly finances (since most of us are paid monthly); and from there to build a long-term strategy to grow your wealth.

Before we get started though, there is some disappointing news. After a dozen years, Intuit has pulled Quicken from the UK market. Perhaps it believed that Microsoft Money was always going to come out on top. It's a disappointment to users who upgraded to the latest version, XG, only to have customer support whipped away.

The loss of Quicken is surprising but not exactly a great shock. The Holy Grail for both Money and Quicken has been the ability to hook up with online banking, in particular being able to download bank statements from financial institutions directly into the software.

It's a process that's always been fraught with problems and conflicting standards. Microsoft Money at least is able to talk to 22 UK banks. Intuit has struggled to round up half a dozen.

Intuit has promised it will support Quicken until January 2006 although, given its history on support we won't get too excited. Purchasers of Quicken 2002 are still waiting for updates and bug fixes and before the recent announcement its support website hadn't been updated for almost two years. But for those of you who do own Quicken, it is still a powerful piece of software that will do an equally good job as Money, so do please join us.

Creating and adhering to a budget
This is the starting point to money management and both Quicken and Money put powerful tools at your disposal. In the old days things were simple: stick your pay in a tin mug on the mantelpiece and dip in till it's finished. But these days, most people have a current account and perhaps a savings account, a mortgage, loans and credit cards, so it can be hard to know exactly what your balance is at any point.

The first step is to log exactly what you're spending and exactly what your income is each month. You're going to input every item either into Money's Bills Summary (it also includes credits) or Quicken's Financial Planner.

Money and Quicken allow you to create as many Accounts as you wish (simply click on Accounts then New on either package) but if you have salary and bills working through one main account so much the better.

The very process of pulling out a box full of regular bills and receipts and entering them into the package may encourage you to simplify. After all, it may show up the odd standing order you set up long ago and never cancelled.

Why are you still paying insurance on your old mobile phone? Do you really want to maintain that gym membership? It's called 'inertia marketing' - you set things up and never cancel them and the companies are effectively making money from your laziness. Obviously it makes good financial sense to root out this kind of expenditure that is bringing you no benefit.

Having logged our incomings and outgoings, the software is already beginning to build a budget, listing the current standing and how our balance will look after forthcoming transactions. But this isn't even half the story. We don't want to budget from day to day, but monthly, and then use this data to draw a picture of our wealth in 10 years, or at retirement.

When putting a budget together it's important to remember that there are two sides: logging what you currently spend and planning what you can afford to spend. Going to the Budget menu in Money, we can start apportioning salary to different areas.

You'll need to study your historical spending here and cover life's unavoidable cash drains (utility bills, mortgages or rent and so forth) before giving the remainder to luxuries. At this point we can also see what our net worth is.

Receipt management
But let's backtrack - how do we log our regular spending? Most of us scratch our heads in wonder at where all our money goes, but as you input data into Money or Quicken on a regular basis, a pattern of your spending will begin to appear.

Much of your money will dribble away in cash purchases but a huge category simply labelled 'miscellaneous' is not good enough. How much went towards food? How much for fares or newspapers or presents?

To put together more valuable data, first resolve to put as much of your spending as possible on plastic. This way you'll be able to work through your bank statements and see exactly where everything went. And if it's on a credit card, your purchases are likely to be insured - at the very least your payment will act as a receipt should you need to take the goods back.

Also make a mental note of daily purchases such as bus tickets, newspapers and even cigarettes (the fright caused by how much you spend on them might change your thinking on the habit).

This is important because when we get to generating reports on our spending we need to be able to break things down. Under the Reports menu, Money can generate charts and diagrams to colourfully display where the money goes, which helps to highlight excessive expenditure.

For now at least, keep receipts for everything and use these to update your entries for bills and expenses. There's a limit to how much detail you can achieve and there are certain logistical difficulties here too.

The way Money and Quicken work is to log all regular and spontaneous transactions. Regular outgoings we have dealt with. Other purchases and cash withdrawals are harder to track.

Money and Quicken loathe an unassigned withdrawal, wanting to know exactly where the cash was spent. The problem with a cash withdrawal is that it represents at least two transactions (and possibly dozens more): the transaction you logged into Money, say, when you took your £100 from the cash machine, and the transaction when you actually spent it.

We've already decided to put most of our spending on plastic but as for the rest, don't become a slave to the software. There's no need to break your cash spending down to how much you spend on Mars bars in a week.

Treat a small amount as a petty cash float (the way businesses do) and spend it as you wish. Better still, limit it to a fixed amount (say £20) and get it out of the bank on the same day each week. Money and Quicken will let you set this up as a recurring transaction.

Before you can start to think about saving you have to eliminate debt. There is no point stashing £50 a month in a savings account paying five per cent interest when you are running up a credit card debt at 18 per cent.

In Money, go to the Planning menu and start building your Debt Plan. This tool will use the outstanding balances and interest payments on loans and credit cards to predict when your debt will be cleared (also the total you will have paid off). This should also be a stimulus to getting debts paid off more quickly and switching to cheaper providers.

Get in synch with your bank
Synchronisation is all about downloading your account details from your bank directly into Money or Quicken, typically to update and check your figures. But there are big question marks hanging over this. Click Connect to bank in Microsoft Money and you may be lucky (or you may get the message we do when we try to connect to our bank, even though this is with one of the big four clearing banks).

If you are lucky you then have to deal with the horror of the various file formats. Your bank may supply statements in QIF, OFX or OFC format (which Money accepts) but it may not. To add to the fun, not all versions of Money accept all three formats.

And if you think Money has its limitations, don't even try with Quicken. At the last count it was supported by six institutions, none of them the big four banks. It also has difficulty reading QIF files, a file format that was invented specifically for it. Frankly, your best bet is to access your accounts independently and manually make adjustments to your Money or Quicken files.

A good idea is to do this monthly as the paper bank balance drops through the letterbox. There's nothing odd or wrong about a monthly update - it's a miracle if everything balances without adjustment and every business does a monthly tidying up of the figures.

Planning is where Quicken and Money come into their own. Both programs will roll your current debts, liabilities, income and capital goods into a snapshot of your wealth and project the future. Here's where you start thinking about pensions, savings, reducing debt, increasing investments.

Our carefully constructed plan sees us, whoops, running out of money sometime around 2024 - and we weren't planning on dying until 2050. Fortunately we can adjust our savings, rates of interest and cut expenses as long as we want, seeing the effect on our overall wealth. But everything can change, which brings us to up-to-date data.

Stay up to date
Money management software is at heart a very simple thing. Credits in Column A, Debits in Column B. Subtract B from A and you have your balance. But if that were all there is to it, we could just use a spreadsheet, such as Excel.

But financial management is subject to new products and changes to legislation like no other area. There are countless good financial websites on offer, from the high-end business pages of the Financial Times to friendly personal finance offerings such as Thisismoney and The Motley Fool.

Microsoft has a real winner in MSN Money. There are loads of tools and calculators for working out loan, pension and savings contributions, how much you'll need to save to hit a certain amount by a given time, and so on.

And since Microsoft doesn't have a vested interest, it's impressively objective. If you have never fired up your version of Money this would be a good bookmark for getting your finances in order. You access the site from within Money itself.

The bar at the top of your Money homepage has 12 menus. The first four (Home, Accounts, Bills and Reports) open those areas of the desktop software. The next eight (My Money, Investing, Banking, Planning, Mortgages, Insurance and Students) take you online to the relevant section within MSN Money.

Everything is opened within the normal Money browser but the web-style address bar above the menus will change from Budget Summary (for example) to display the website address to show you are accessing online content.

Quicken simply can't compete with this and gave up trying to a long while back. But as there's a wealth of free information online anyway (why not just go to the Money website Quicken users?) it's not going to impede your use of the software in any way.

Be penny wise
Personal finance programs such as the two we've covered here are a brilliant idea, with some serious caveats. Money and Quicken are a marvellous way to get into the budgeting and planning habit: friendly interfaces that pull every aspect of your finances into one place. And Money has excellent support, mainly on the dedicated website.

But importing your bank information? We don't think so. The horrible experience of Quicken users should be a lesson. And anyway, do you really want to spend hours trying to track where that 50p went?

Why complicate things when you could just access your account online? So buy a copy of Microsoft Money: it will be £25 well spent. You will have a fun time getting your finances in order and using the software will help to discipline your spending and budgeting.

How secure is online banking?
Identity theft and phishing have been making the news for a while. So with your financial information floating around in hyperspace, how safe is your money? Current levels of security mean you have very little to worry about.

Sensitive online data is protected by encryption while in transit. While it is theoretically possible to crack computer codes (a US university student took almost four hours to crack a single 56-bit encrypted code using some awesome computing power a few years back) actually doing it is so difficult as to be beyond the means of the everyday hacker.

Today banks use 128-bit encryption, which nobody has ever cracked, and it means that the key to your millions (or your overdraft, as the case may be) is in fact one of many billion number combinations.

In fact, so secure is it that the US government originally limited the sale of the standard overseas, as it realised that it simply wouldn't be able to decrypt any online messages protected by 128-bit encryption.

Use a safe password for all banking services, such as a mix of numbers and letters that you will remember. Ensure that your bank uses encryption via a safe site: the website address should begin 'https' (the 's' means 'secure') when you are asked to enter passwords.

Don't use internet cafes to access bank details, and never, ever give out account details via email. The classic phishing approach is to email you, directing you to the bank's website (in truth a cleverly faked front end to a site which will then swallow up your details and use them to access the real website).

Shared secrets
You have two layers of protection for your MS Money or Quicken files, which is crucial if you are using a shared computer at home. You can't put the family PC out of bounds to other members but you can password-protect individual user accounts within Windows, setting up different user accounts for family members.

You can also password-protect individual Money and Quicken files themselves. Unless you have CIA-trained crypto-crackers stalking the living room this should be enough for you, offering the 128-bit encryption favoured by the banks themselves.