There's creation in destruction. Or, if destruction isn't quite the correct word, perhaps disassembling might work better. There's something to be said for deconstructing in order to reassemble in a stronger, more intentional structure. No, I am not talking about a revolutionary uprising or acts of sedition; I am talking about rethinking the way in which you find a path to a happier relationship with money and a more balanced and successful feeling about your life. I believe it is fair to say that many of us are consumed with money; getting it, spending it, keeping it, worrying about it, trying to get more of it and even making it work harder. These worries are just added to the pile of stuff that consumes the rest of our lives; our family life, work life, our health and then all the other wants and needs that finish off the buffet of issues battling for space in our consciousness and subconscious. Exhausting!
So, how did we unclutter the pile and find a path to specifying and simplifying? If you work the way I do, you make lists, you create mind maps - you put things into buckets and prioritize. Think of it as the mentally cleaning out the attic or basement (only using fewer trash bags). The first step to cleaning out is finding a system that works for you. I am a big fan of the bucket method. The bucket-method allows you to see your financial life in three buckets. It's simple, easy to manage and allows for a visual representation to your financial goals.
Think of your money life as three buckets: your monthly savings requirement, your fixed monthly expenses, and your weekly discretionary amount. Notice I mentioned savings first; this was not an accident! Let's look at what belongs in each bucket:
Savings Bucket:
1. Emergency fund
2. Retirement accumulations (401(k), IRA, etc.)
3. College Savings
4. Other Accumulation needs
Fixed Expense Bucket:
1. Mortgage/Rent
2. Utilities
3. Food
4. Transportation needs
5. Debt
6. Other contractual expenses and fixed expenses
Discretionary Bucket:
1. Entertainment
2. Eating Out
3. Movies
4. Vacations
5. Other non-required costs
Now that you've assigned your spending to a specific bucket, it's time to take the next step. Begin with your monthly net income, subtract off your savings bucket and then your fixed monthly expenses. Assess your balance and compare it to your weekly discretionary expenses. Is there a surplus or deficit? If you have a surplus, congratulations! You're probably a good saver and have your spending under control. If you have a deficit, or your discretionary spending is greater than the balance left over after you've deducted savings and fixed costs, it's time to make some necessary changes.
As a planner, I am loath to tell a client where they need to cut back. I believe everyone needs to assign a value to their spending, whether it's for vacations, dining out, or even charitable contributions. During a recent meeting, the following conversation occurred with a couple that came to see me to help them amass funds to purchase a house.
Jason and Angela are in their 30's. They have no children, good jobs, massive student loans and an aching desire to buy a house. They were enjoying an active social life and making monthly 401(k) contributions, but they just couldn't accumulate enough money for a down payment. Their income numbers looked great, so obviously I was going to have to dig a little deeper to help them find a solution. I congratulated them on their success, to which Angela replied,
"Still, we just can't seem to accumulate money on a regular basis. We both work very hard and I feel if I give anything up, I will be miserable!"
Jason continued, "I am sure you're going to tell us to stop spending so much on clothes and vacations and gifts and entertainment. But I agree with Angela. A significant change in our lifestyle will really make us feel like we're depriving ourselves."
I nodded. The picture was getting clearer. It seems that although they had convinced themselves that they wanted to buy a house, they were even more invested in their lifestyle.
"There are only three components to your financial life," I began. "You're income, your fixed expenses and your discretionary spending. Do you have the ability to earn more income?"
"Other than any normal bumps, nothing extraordinary," Jason answered.
"According to my calculations, if you buy the home we discussed, your fixed costs will increase by about 15%. Therefore, all the things being equal, you would need to decrease your discretionary spending by that amount. But in the short run, in order to accumulate enough for the down payment, you would need to reduce your discretionary expenses by 50%. If you do that, it will take approximately 30 months to reach your goal." I paused. "Or, you could forget buying a house and stay in your apartment."
They both grimaced. After a few minutes, Jason tentatively said, "Well, I suppose I could buy fewer suits. I don't really need to spend all that money on Armani suits."
Angela picked up the cue, "Yeah, and I guess we don't need to go to Hawaii on vacation. We could probably go to Florida and stay with my mother, she has plenty of room."
Jason continued, "I suppose I could bring lunch in during the week. A lot of the guys in the office eat in."
Angela added, "We could cook more, like we did when we first got married! That was fun, right? We don't need to eat out so often."
Pretty soon, we were capturing their ideas on the white board. They watched their discretionary bucket diminish and their savings bucket fill. The mood lightened as they could see their dreams becoming more achievable.
Finding practical solutions to your financial well being doesn't have to be complicated or overwhelming. In fact, the simpler the better. By prioritizing your goals and dreams and then applying the bucket method, you will see, in black and white, what needs to be done. If you're looking to find financial happiness, stick your head in a bucket.