Get your budget in gear
In the “COVID economy,” many of us are having to tighten our budgets and belts. In such stressful times, having a spending plan can help you rest easier. So here are budgeting techniques I find work even for the laziest of budgeters, like me.
If you prefer to go fancy with the spreadsheets and workbooks, there are many out there to choose from. But remember: No system works if you don’t use it.
Step one: Automate everything
And by “everything” I mean as much as you can: ◆ Automatically deposit your income into your checking account.
◆ Automatically set aside your savings into a savings account.
◆ Automatically pay all your recurring bills.
◆ Use electronic payment options so you automatically have a record of every transaction.
◆ Automatically download all your transactions into a good financial software program once a week.
Getting this set up will take time, but it is a critical investment of your energy that will reap huge rewards.
Step two: Carefully track all your expenses
Here is a simple exercise for tracking your expenses and building a budget. In my economics classes, we called it the AB/ CD technique, and my students adopted the AC/DC song “Back in Black” as the soundtrack:
A. Automate. Then carefully record and categorize all your expenses for at least two months.
B. Break it down. Once you have two months or more of data, break it down into two categories: fixed expenses and flexible expenses. Your fixed expenses are things like the mortgage or rent, utilities, gas and minimum debt payments.
C. Comb through your expenses. Look for leaks in your wallet: small, recurring charges for things you can do without and might have even forgotten you signed up for in the first place. Slim down.
D. Do the math. Subtract your fixed expenses from your monthly income. This is what you have left for everything else — your flexible expenses. Flexible expenses are food, clothing, entertainment, gifts and so on. Now take your flexible expense total and divide it by 30 days in a month. This is your daily budget. Ta da! Budget accomplished.
If you have $1,000 in flexible spending each month, then you can spend about $33 a day or $250 a week, whichever number is easier for you to work with. The key is to hold as few numbers in your head as possible.
Step three: Play ‘Lava’
Did you ever play “Lava” as a kid? We would throw the couch pillows around our living room when we were small and then try to jump from each piece of furniture or pillow to the next without touching the floor. The floor was lava. Anyone who hit the floor burned up in a fiery blaze of imaginary agony. It was like “king of the hill” for rainy days.
I do the same thing with my checking account. I set an imaginary lava point I cannot hit. For me it is $2,000. I will never, ever let my checking balance fall below $2,000. If I do, a fiery financial death awaits.
Why is this important? Because the real lava point is zero. No money. Broke. But if you hit zero, what happens? You start to bounce checks, or worse, you start taking on credit card debt. You can never go there.
So your fake lava point is your new zero. If you accidentally, from some twist of fate, fall below your new zero point, life is still OK. You need to scream, panic and scramble until you get back on solid ground, but you won’t fall into credit card debt.
You can set your lava point at any dollar amount that works for you. But you need a lava point that you never cross under pain of imaginary death. It’s a mind trick to help you reframe your expectations.
Without a budget and spending goals, you are likely to burn in a molten pit of financial torture for the rest of your life. However, if you automatically pay all your bills, set a budget and play Lava daily, you’ve started down the path to becoming a little bit wealthy.
Doug Lynam is a partner at LongView Asset Management in Santa Fe and a former monk. He is the author of From Monk to Money Manager: A Former Monk’s Financial Guide to Becoming A Little Bit Wealthy — And Why That’s Okay. Contact him at douglas@longviewasset.com.