Why would I use Quicken or QuickBooks? (2/18/09)

The very short answer
In my experience helping clients use their computers to organize their finances, the two core motivations are:

Taxes: Whether you prepare your own taxes or have someone else do it, using software can make gathering the information you'll need at tax time much easier.
Curiosity: Since you can choose what to track and at what level of detail, you can see how much you're spending on specific things (beyond what's required for taxes) such as food, payroll, gas, or coffee, as well as how one source of income compares to another.

Clients who want to start doing this will often say "I have no idea what my finances look like" or "Where did all the money go?"

Choosing between Quicken and QuickBooks:

Quicken is all about Bookkeeping. It's great at tracking income, expenses, investments, transfers between accounts, money people owe you, and money you owe to others. If you run a business and use Microsoft Windows, the "highest level" of Quicken can also produce simple invoices. So if you want to track personal finances or a simple business, I usually recommend Quicken. Microsoft Money is another popular program that's comparable to Quicken.
QuickBooks is all about Accounting. Imagine Quicken on steroids. If you set QuickBooks up properly at the start, it can let you view your business from a "cash" as well as an "accrual" perspective, track inventory and depreciation, do payroll, produce estimates, invoices, balance sheets, and more. Every accountant I know loves QuickBooks. If you're running a business that needs any of its features, I usually recommend QuickBooks. Peachtree and MYOB are also popular programs that are comparable to QuickBooks.

Even though spreadsheet programs like Microsoft Excel are great for working with numbers, I don't recommend them for detailed bookkeeping. They're so flexible, they don't give you enough structure to do it efficiently.

For simplicity, in the remainder of this article I will use Quicken terminology (Accounts, Categories, etc.). QuickBooks and other programs all have the same concepts but use somewhat different language.

The costs
In addition to the cost of the software (roughly $45 to $80 for Quicken, $100 to $200 for QuickBooks), the other less-obvious "costs" are:

Your time to set it up: Accounts (checking, savings, credit cards, etc.) and Categories (food, gas, salary, consulting, etc.), learning how to use the software--at least 3 to 4 hours for Quicken, more for QuickBooks
Your time to use it properly going forward: Typing in or downloading transactions, categorizing them, reconciling with bank and credit card statements, running Reports--probably a few hours per month. On the bright side, when you enter transactions that are similar to ones you've entered previously, you often only have to type the first few letters.
As an alternative, you might hire a bookkeeper to do these tasks for you. This will save some of your time, but you'll still need to answer the many questions a good bookkeeper should have for you, e.g., "How shall I organize your bookkeeping?" and "Who's John Smith and why did you pay him $100 last month?"

The benefits

You can create Reports that scan through your income and expenses and give you bird's-eye view summaries ("I spent that much on coffee? health care? meals?"), detailed breakdowns ("Ah yes, I see that I went to Starbucks almost every day"), multi-year comparisons ("At least it's less than I spent last year"), and more.
If you keep up with your bookkeeping on a regular basis, in January or February after you finished entering the previous year, with a few clicks you can create summary and detailed Reports for the prior year. This makes preparing your personal or business taxes a lot faster and easier.
Your finances can now be searched easily, so questions like "When did I buy that printer?" or "Did I get that check from that client?" become easy to answer in minutes.

Already using Quicken or other software? Top mistakes to avoid

Back up your data file regularly. You may have spent years entering data, don't put all that work at risk.
Add a password to your data file to keep unauthorized people out.
If you deposit multiple checks together, it's time to start keeping track of the individual checks that are part of each deposit, and itemize the amounts and whom they're from using a split transaction. This is especially important if you run a business.
Review your Categories for redundant or confusing items such as Charity vs. Charitable, Car vs. Auto, Postage vs. Stamps, Misc vs. Miscellaneous, etc. Separate business Categories from personal ones using Subcategories to form groups.
Before creating a new Category, ask yourself: At the end of the year, does this deserve to be a line item on my Summary Report? Should it be a top-level Category, or a Subcategory?
When entering an expense reimbursement, don't create a new "reimburse" Category. Instead, use the original expense Category for this "deposit" because it reduced what you spent. For example, you spend $100 in Supplies and then later get reimbursed for $20. Enter both the $100 expense and the $20 refund using the same "Supplies" expense Category, so your Reports will show you actually only spent $80 on Supplies.
The best date to start entering transactions for a new Account is at the start of a statement period. If your bank or credit card statement doesn't start on January 1st, then go back to the statement that "straddles" January 1st and use its opening date (and balance) from December.
When you enter a check to pay a credit card bill, don't split the check to list each credit card charge. Instead, create a separate Account for the credit card and enter the charges as separate transactions in that Account. Then, when you enter that check in your checking Account, use the Transfer Category for that credit card, e.g. "[Amex]".
Similarly, to track your cash spending, don't split your ATM withdrawals or use a regular expense Category. Instead, create a separate Cash Account. Count up all the cash you have on hand and use that as its Opening Balance. Then, enter your cash expenses in the Cash Account, and enter your ATM withdrawals from your checking Account using the Transfer Category for that Cash Account, e.g., "[Cash]". Periodically count your cash, and if the total doesn't match the Cash Account's running balance (quite common with cash), enter the difference as an adjustment (e.g., "unknown spending").
When you create a new Account, your memorized Reports may not automatically include it, so review all of your Reports to check that they scan the correct Accounts.
Clean out your Memorized Transaction list periodically so the software doesn't keep suggesting Payees you no longer use.

Where to go from here

Quicken: http://www.quicken.com; compare versions of Quicken at http://quicken.intuit.com/compare_products.jsp
QuickBooks: http://www.quickbooks.com; compare versions of QuickBooks at http://quickbooks.intuit.com/product/accounting-software/quickbooks-comparison-chart.jsp
Microsoft Money: http://www.microsoft.com/money
Peachtree: http://www.peachtree.com
MYOB: http://www.myob-us.com

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