I propose that there are 4 key elements in any good financial strategy:
- Covering Thine Ass
- Simple Rules
I should add that I’m not even going to bother with topics like investing, as if you’re in the land of irresponsible twattery (as I was only a year ago), you shouldn’t even bother worrying about such things.
Covering Thine Ass
What do you do when your car explodes? Your cat gets rabies? You get laid off?
If you don’t have an emergency fund in place you’re toast (or having to deal with Welfare, which is doable, but from what I’ve heard is much more of a pain in the ass than it was when I received it about 5 years ago).
Your emergency fund should be able to last you the amount of time you estimate it would take you to recover from any act of gods. For myself that’s 6 months (rent, mobile, internet subscription, food). It’s also preferable to err on the side of a longer period when you’re not sure. This fund should be highly liquid and available within a day or two of needing it. It shouldn’t be hooked up to a plastic card in your pocket. There’s no need to make it separate from your savings account, but be sure to set the watermark for that emergency fund clearly in your mind.
Fancy-ass word for data.
How well do you understand the relationship between your behaviour and its effect on your degree of financial freedom? I’ve found it all too easy to make assumptions in the past about how well I was managing finances.
The solution is as simple as one spreadsheet and one graph.
We’ll start with the graph. Below you’ll find my own format, but you’re free to choose what works for you. For myself I wanted the following:
- Total Assets: what’s yours
- Total Savings: what’s for later
- Financial Net Worth: you’re more than your bank account, but a number is useful
- Total Debt/Liabilities: what’s not yours that you think is yours
- Behavioural Annotations: why do you see what you see?
To collect this data, I harnessed the power of Mint. In a nutshell, it’s a beautiful tool that hooks up to all your web banking accounts at various financial institutions, automagically categorizes transactions, and gives you cute little reports over various spans of time. It’s not exactly perfect, and my largest gripe is that the net worth graph doesn’t give you enough granularity over larger spans of time. For this reason I whipped something up in Google Drive to give me the timespans and granularity that I wanted (1 day over any time period).
Aside: Mint can only work its magic if you use debit transactions (categorization relies on the description field of your web banking app). In some cases you can run up some fairly steep transaction fees. For roughly $15/month you can get unlimited transactions, and as this method will likely save you more than $15/month, it’s a no-brainer.
Voila (with values removed to hide how much of a capitalist pig I’ve truly become).
The difference between loosely estimating your ability to create financial freedom, and actually having real data cannot be understated. The funny thing about this graph is that the act of creating it influences the data in it. If you cover up everything but the first 4 and a half months, you can almost imagine the awareness of my irresponsible behaviour blossoming, forcing me to sit down and re-evaluate my spending habits. You can see the net worth line (green) dipping below the savings line (red), and the way that debt (yellow) can give you a false picture of what’s actually put away for the future (debt has to be paid eventually). You can see how over time paydays and rent (annotated for clarity) gradually allow the asset/net worth lines to move farther above the savings line (behaviour adjustment), and you can also look at the slope of the lines to get an idea of “burn rate.”
I could go on for days on how valuable this has been, and the only cost to me is to take 5 minutes a day to transfer the data from Mint into the spreadsheet. This is a ritual that forces me to account for my financial transgressions honestly and openly. Sign up for Mint now, even if you can’t be arsed to start plotting it in so much detail, it costs you nothing in time to let it sit there collecting the data for you in case you decide to try this at a later date.
But this isn’t the whole picture. This is just what’s already happened. If you want a snapshot of the future, you need a budget.
Traditional budgeting methods piss me off immensely. The amount of work required to put them together can induce so much stress that you’ll need to blow cash to compensate for the sorrow. The pictures they give aren’t very informative, and generally have you break everything up by category across a monthly or weekly span. Then when you go to compare your behaviour to planned behaviour, there’s the endless slew of, “now which of my hundred categories does this one go in?”
So throw that all away. No more million and a half categories, no more tallying things up within a monthly context, no more fuss.
What you need:
- A listing of fixed monthly costs (rent, mobile service, internet subscription, transportation, etc.)
- A list of dates you expect to receive income, and what the amount is (easier if you’re salaried, but estimates can be made with all the data you’ve been collecting if your income is more erratic)
That’s it. Let’s have a look. (because the numbers matter here, I’ve come up with a contrived example: Little Bobby and his paper route)
Little Bobby is a fairly enterprising newspaper deliveryperson, and pulls in $200 bi-weekly. His parents are weird, and being only 11 is not enough to stop his parents from charging a monthly rent of $30. He has a $20 mobile bill due monthly on the 15th, has his own subscription to TekSavvy which costs him about $45/month (due the 15th), and gets around with his $68/month transit pass (which would in all likelihood be cheaper, but I didn’t care to look up the student pricing).
For each date under the payday column, based on the due dates of his fixed monthly costs, he allocates the payday from which those expenses will be paid. He also notes which month of service/rent he’s paying for.
From there the spreadsheet wizardry calculates his maximum savings potential, and as he puts money away into savings after each payday, he notes the value of the account. He gets immediate feedback on how close or far he is from his savings goal. Here we see that after falling slightly short of his goals, he re-adjusts his daily allowance (more on this in the next section) in favour of future savings.
Even in the case where he gets paid a week or two in advance of a fixed expense, he’s able to have a clear picture of how much of each payday he can put immediately into savings (which is the way to go, as he doesn’t miss it once it’s there). As long as he’s careful to maintain his daily spending allowance, he will likely never come up short, or have to worry about where the money for something will come.
This method simplifies things by acknowledging that you can’t always split things in terms of a fixed percentage, and that recurring costs are ideally associated with the nearest payday that’s before the due date.
You may have noted that I didn’t include columns for food, entertainment, etc. This brings me to my next point…
Micromanaging your budget across a large number of categories is a pain in the ass.
Solution: set a daily spending allowance for any category where failure to pay won’t result in a collections agency breathing down your spine.
The benefits are twofold. First, you can spend it on whatever the hell you want (it’s yours, and it’s budgeted for). Second, you can spend less time categorizing all the knick-knacks you bought at Dollarama, and more time focusing on the bigger picture.
Personally, I play with this number loosely (having no immediately pressing, interest-incurring debt). Having the number in my mind simply makes it easier to have an appropriate sense of scale when I’m standing in front of something in the store. I might spend 3 times my daily allowance in one night to go partying, but I can quickly calculate how I’ll compensate for that by packing lunches every day for the next week of work, or how I’ll spend my next weekend at home reading instead. I don’t need to carry a PDA everywhere micromanaging every dollar, I can think of the consequences broadly, while still operating in a longer-term framework effectively.
Pro-tip: If you spend somewhat recklessly, set this amount on the higher end at first. Keep it in the neighbourhood of some savings and no new debt (or making at least your minimum payments if you are in debt, hopefully more). This will help to smooth out the transient splurging spikes (as you’ll be more actively aiming to beat the target you’ve set for yourself). From here aim to adapt your behaviour so that you can consistently fall short of the daily limit (ammortized over a week or two to account for reasonable exceptions, if any), and then bring it down. The difference can now go into your savings account.
Now you’re only babysitting one number in your head instead of tens or hundreds. Laziness has its benefits. Now we can talk about what you need to bring your daily amount as low as you can…
In the past we were awesome at saving. It wasn’t just that it was a necessary part of survival, there was also far less “consumption porn” to lead us astray. Now people can own things they can’t afford almost effortlessly. The world of finance has conditioned you to believe that there’s always a way out where your intuition would rightly say otherwise. The world of advertising has thrown billions of dollars into convincing you that the fancy kruft of modern life will always make your life better. And if it’s not the financial world, or the advertisers, then culture will silently push you towards a life with less freedom for the sake of fitting in.
Rather than lay out a roadmap to thwart these obstacles, I’ll just share some notions I’ve come across:
- The anticipation of purchase has been shown to be more satisfying than the result of purchase.
- The price tag doesn’t list the psychic cost of having to manage the things you own.
- Experiences will always bring you more happiness than possessions, and you don’t have to lift them out of the way when you go to sweep the floor.
- You often spend less, and to greater effect when giving to others.
- Following your dreams is the key to happiness, and yet the one-off examples of people with brilliant ideas and shoestring budgets who reach actualization are more the exception than the rule. You’ll thank yourself tomorrow for letting your present self put something away today.
When I look at the difference in cultural financial behaviour between days gone by and now, I wonder how much of our global financial mishap could have been avoided if we held on to what made us resilient. It’s no small task to have concern for finances while we watch families being dragged out of their homes, and banking executives walking away with profits whose magnitudes ought to have been their fines.
It is clear though that when you really take some time to look at the data, your ability to decide what is affordable and what isn’t can be honed. How would we have bank runs if there was no one who wanted the banks to overextend their reserves? I’m not naive enough to believe that this alone would prevent them from tying themselves in a knot at our expense. I’m also not crusading against debt, as having capital available is critical in expanding an economy.
What I hope I’ve outlined is that the relationship between individual behaviour and finances has a role to play in the larger economic picture. You won’t only afford yourself more freedom, you’ll become more self-aware, and the nuanced insights you’ll gain in your own version of this journey will give you the power to envision solutions to some of the world’s problems.
And it only takes a rainy day fund, a spreadsheet, a graph, a single flexible rule, and restraint as suggested by history and some feel-good financial truths.
Now go forth, and put all those accounting package users to shame.
I’m interested to know what simple strategies others have applied. Hit me up in the comments below.