How I learned to quit worrying and love the budget
11/30/2008 at 18:03 from (47.683479, -122.266725)
When it comes to money, Marijana and I are a study in contrasts. She has a remarkable aptitude for planning and memory. She can mentally attach an earmark to an arbitrary dollar amount, then track its performance over time. She possesses restraint and frugality. She doesn't have any expensive vices. Her indulgences are cheap and she's not overly interested in material consumption. She gives a lot and takes very little.
This has a good deal to do with why I married her.
I, on the other hand, could easily be characterized as the "average American consumer". I have a terrible memory and am thus utterly inept at planning. I conceptualize money poorly and am even worse at reconstructing spending habits. I make impulsive purchases. I love to treat myself (often to excess) and others. I have almost no restraint. I have expensive vices. I take a lot and then I take a little more.
We are, in short, near opposites when it comes to financial planning.
The contrasting characterizations of Marijana's and my feelings about money should have sent up a red flag to any couple or marriage counselor. Finances are a major factor (if not the major factor) in divorces in America, and judging by our profile, our chances don't look good.
Luckily, I have a small enough ego to realize that this is an area where I'm hopelessly outclassed. She has a degree in economics and training in small business administration. I can barely identify primary colors by name. I was simply not destined to be the master of the house finances. Which is great because, and here's the kicker, I hate thinking about money. It is for me, as the Dude famously said, "a real bummer". Money matters tend to make me flustered and irritable, generally because they force me to reconcile my careless behavior with the consequences of my idiocy.
Reality and I don't get along well.
Rising action
However, the reality of our poor financial management could only be ignored for so long. The cracks were already beginning to show when we were dating. Our finances were independent then and the contrasts were stark. Marijana lived on almost no money and could stretch her budget for months, seemingly without effort or discomfort. I was constantly dipping too deeply into my checking account and couldn't seem to put money in fast enough. Things were coming to a head.
We first realized that our conflicting philosophies were problematic during our Pre-Cana, which is a mandatory class that Catholic couples must take before getting married in the Church. We had both assumed (as I'm sure anybody would) that this ritual would involve lots of conservative and judgemental discussion about Church dogma. It was, instead, a form of pre-marital counseling. We were encouraged to discuss, in a frank and open dialog, topics like sexual compatibility, career expectations, our respective roles in the relationship, family planning, conflict resolution, and communication.
And, in a twist that surprised us both, it devoted an inordinate amount of time to a discussion of financial planning. Like most of the topics we covered that day, it was the first time we had directly discussed the management of our finances. The more we talked, the more we realized how different our approaches were to the management of money.
We started to get that uneasy feeling that each of us was about to marry a total stranger.
Pre-Cana highlighted a number of fundamental disagreements we had about a lot of things. We had differing views on child rearing and whose responsibility it is to wash the dishes. We had committed the fatal error of assuming our partner shares our perspective and opinion, which is no different than ignoring the problem. Left to fester, these are the little misunderstandings that claim most marriages.
That's right about the time that Deacon Bob came over and reminded us that what is important isn't that we prescribe to the same philosophies, but that we communicate our differences and negotiate some compatible middle ground. Until we highlight our issues, we couldn't hope to solve them. The success of our marriage depended on our ability to quickly and clearly communicate our problems, which is something we happen to be good at.
We were relieved. We smiled, kissed, left, got hitched, and promptly forgot about the whole thing. We went almost a full year without actively managing our finances. We had small fits of responsibility, sure, but nothing sustained or sustainable.
Conflict
The troubling thing about knowledge, though, is that it has this nagging unwillingness to be forgotten. And so, as my spending habits dragged Marijana onto the same rollercoaster I was used to riding, we were forced to sit down and really talk about our finances. What we found was that we were really talking about our values, goals, and priorities. To a great extent, the things we wanted to spend our money on reflected the way we wanted to live our lives.
We had known for some time that we shared common aspirations and values, but we now found ourselves having to choose between two competing paths to achieving those goals. On the one hand was Marijana's methodology, which I considered to be overly rigorous and ascetic. And then there was my bacchanalian approach to money management, which was less of a methodology than it was thinly veiled hedonism.
In the end, we came to a number of compromises and decided on a program that was based on a few simple rules:
Simplify.
It wasn't so much our initial purchases that were killing us, it was all the upkeep and accessories. Game consoles needed new games and controllers. The car needed maintenance and gas. Our growing stash of clothes and dishes and blankets and bags demanded more drawers and cabinets and closet space.
We were constantly buying stuff to store, accessorize, clean, repair, or recharge our existing stuff. Then we bought stuff for that stuff. Every item we acquired had its own ecosystem of attachments and compatible devices. And when we tired of maintaining one pile of stuff, we would throw it away and buy another disposable pile of stuff for the same amount of money.
We had ceased to be consumers and were rapidly becoming the consumed. If we wanted to get our finances back under control, we realized we had to cut back on the amount of stuff we acquired, even to the point of getting rid of stuff we already had.
Along with that, though, was the perceived value of "convenience". For most of our conveniences, upon closer inspection, the value was not nearly worth the cost. And for some, like commuting by car, there was no value whatsoever. The costs were huge, and it was actually less convenient to keep driving to work.
We immediately transitioned to the bike or the bus. We curtailed our dining and resolved to cook at home more. We slashed conveniences wherever they were too costly or, well, inconvenient.
Avoid debt.
Neither of us much liked the prospect of going into debt, but we initially accepted it as an unavoidable part of growing up and becoming independent. It was a natural assumption because everybody around us was doing it, and in a hurry, too.
And then we realized that debt makes no sense at all. It is a trap designed to wring sustained, predictable profits from less valuable goods.
People kept pushing us to "establish a good credit score", but after agreeing to adhere to the first rule, we couldn't think of anything we'd actually need badly enough to go into debt for. We couldn't justify the cost. Anything large enough to necessitate entering a credit program -- furniture, appliances, cars -- we could comfortably do without by living with the old versions of what we had or buying something smaller, uglier, or used.
We were too young and our futures too uncertain to even entertain the possibility of buying a house, no matter how good a deal some of our well-intentioned friends told us it was. Committing to 30 years of steady payment for a single purchase seemed excessive given the amount of uncertainty in life. I can't keep a bike upright for more than 6 months of commuting, so how could I commit to a steep and unalterable monthly payment from now until I reach retirement age?
And credit cards just seemed like a bad idea entirely. They were too much work to manage unless we wanted to live beyond our means. I mean, if you think about it, proper management of a credit card is just the advanced shuffling of money around over the space of a month. Why deal with all of that hassle when we could just pay in cash and not have to worry about the inevitable reckoning at the end of the month?
Note: This may be the first time anybody's ever used laziness as an excuse not to get a credit card.
Budget for anticipated costs.
We have lots of costs that are periodic and regular. Rent, utilities, phone bills, grocery costs, and other basic living expenses are pretty constant month-to-month. We simply made a list of these costs, added it up, and committed to setting that aside from every paycheck every month. If we wound up spending less than anticipated one month, the savings would get dumped into the short-term savings account (see below).
Save for the short term.
Shit happens. Plane tickets to Croatia need to be bought at the last minute to attend a relative's wedding. A bike accident precipitates thousands in unavoidable medical costs. Dishes break. The car's tune-up revealed a worn set of brakes.
There are always costs that nobody could ever really anticipate. The only thing we can be assured of is that they will arrive, and usually at a bad time and place. It makes sense, then, to keep a buffer around for those rainy days when it decides to pour.
Any money remaining after the budget and the long-term campaign are accounted for should get dumped into a short-term "soft" fund. This account is flexible and can be used to cover shortages in checking and savings accounts.
Save for the long term.
We identified some goal that we wanted to achieve (traipse around South America for a year) and then agreed to set aside a fixed amount every month toward that end. The more we saved, the faster we could realize our dream.
It should be noted that this is actually the hardest piece. Because we humans have a tendency to prefer instant gratification over the deferred kind, this is the easiest rule to break. The payoff is just too far distant and pales when held up to whatever immediate "need" is present.
To combat this predilection for premature compromise, it helped us to add a sense of urgency to this goal. We put realistic due date on our campaign and then told everybody we knew, so that we'd be less compelled to quietly revise our goal at a later date.
Have fun.
I'm weak and ignorant, susceptible to the siren call of food, drink, and general gluttony. Marijana loves a party as much as the next girl, having been raised on good Croatian wine and amazing home-cooked meals. We both like to travel, entertain friends, and indulge in a movie now and then.
These occasional splurges are healthy and all the more precious in light of our new program of saving. We were to give ourselves a certain allowance toward recidivism, with the understanding that small sins don't become binges.
Falling action
Ok, so all this infomercial stuff is cute, but I wouldn't be spouting it if it wasn't working so swimmingly. How swimmingly, you ask? I think a comparison between 2007 and 2008 is in order.
In 2007 I was making very good money as a contractor and Marijana was working part-time and taking a class or two per quarter at the local community college.
We were rolling in cash, but we didn't save a damn thing.
In 2008 she started attending the University of Washington full-time ($$) and stopped working. I got a cooler job for less money. In total, we stand to make almost $20,000 less this year as income than we did last year.
And we've already managed to save $8,000.
I'll now use pretty pictures to show how we did this...
The graph above compares our monthly income in 2008 with that of 2007. Obviously, December hasn't arrived yet, but as you can see, it's not hard to predict what my paycheck will be. The big spike in 2007 corresponds to a settlement I won (back wages) from a previous employer, while the steep decline is because of my transition between jobs and the obvious gap in paychecks. The spike in 2008 is our tax refund and stimulus payment. April and May were good months, for once.
Looking at that graph, it would be hard to deduce that we're actually saving money. In fact, it would be perfectly rational to conclude that we're actually doing worse... until I reveal this:
This is a comparison of our monthly expenses over the same periods. Yes, we do spend $2,000 less per month now. No, we don't shop at Goodwill or the food bank. In fact, we shop almost exclusively at yuppie stores like PCC or Trader Joe's and eat mostly organic food.
Those two big spikes, in case you're wondering, correspond to taxes and an expensive pair of plane tickets to Croatia, respectively. Notice, though, that it's not out of the ordinary for us to spend more money than average in the spring and fall. Once we became aware of this, we made a point of being extra vigilant and not letting things get out of control during these parts of the year.
Another interesting point is that, contrary to typical financial advice, we overwitheld from my paycheck. I can already hear the torrents of "put it in the bank, idiot!", but our thinking was "out of sight, out of mind". We can't spend money we don't have access to.
Sure, by letting Uncle Sam hold onto the money, we gave up a few hundred (max!) in interest. But we also don't have to pay administrative fees, deal with the hassle of setting up a more secure account or investment, or face down temptation every day. The amount we saved by not having that money within my reach is far greater than the potential loss in interest.
I would also like to point out how much this strategy reduced the stress of tax season. Knowing that a fat government check was coming our way instead of leaving our already strained coffers was a warm sort of solace this past April. Besides, given the recent bank failures and market collapse, not investing that money might have been the best decision we could have made!
Ok, so how did we manage to save this much per month?
Well, we took a two-pronged approach. First we identified our largest nonessential expenditures. These were the prime candidates for the deepest cuts, if not total removal. As you can see below, the top 5 items that weren't necessary living expenses (rent, utilities, groceries), education expenses (tuition, fees, books), taxes, or investments (retirement in this case) were, in order of magnitude, entertainment costs (dining out, movies, gaming), hobbies (swimming, triathlon, photography), travel costs, gifts, and the cost of maintaining our car.
Trimming the fat from our entertainment expenses alone saved us over $3000.
Other savings, though, were in the form of unrealized costs. That is to say, by significantly reducing our car use, we maintained the same cost as the previous year, despite high fuel prices and some expensive service work on the engine in October.
The second thing we did was identify the little nonessentials. While they might have been separately quite small, they were huge in sum. We were dying a quick death by a thousand tiny cuts. Eliminating these was more difficult behaviorally, because they tended to be the sort of spontaneous expenditures that don't readily fall into easily budgeted categories. They were also generally frivolous, though, so getting into the habit of doing a quick sanity check ("Do I really need this cordless drill that I'll never use?") before buying anything took care of the vast majority of these little buggers.
The result of a year's worth of more or less faithful adherence to the rules outlined above is shown below. Keep in mind that, although the "Living Expenses" wedge is a larger percentage of the total, the actual dollars spent are significantly lower than the previous year. In spite of the fact that the consumer price index shot up by almost 4.5% this past year, we still managed to reduce our basic living costs by bringing leftovers to work and cooking smaller meals to save on wasted food.
Denouement
I would say that the hardest part was the first two months or so, when bad habits needed to be consciously broken. As time went by, it became easier to resist the pull of supposed conveniences. Once we had an explicit framework that we had both agreed to adhere to, there wasn't much ambiguity when shopping. We didn't have to weigh every purchase. This has the pleasant side effect of removing thousands of tiny daily decisions. In fact, we noticed an almost immediate uptick in the amount of free time we had together, probably because we weren't spending so much time playing video games, shopping, and rushing around.
And the time we have is much higher quality than what we had before. We both still work too much at home, but we also talk over dinner, discuss politics, read on the bus, or walk through the park together. Much of the stress (and the irritability that inevitably follows) is gone. Our marriage is actually stronger because we spend less money and live more simply. We both know the rules, so there aren't nearly as many of the surprise expenditures that start most fights.
So there you have it: The Davis family savings plan. I know it's not sexy. In fact, most of it is just plain old common sense. However, it's what's been working for us. The real cost, in terms of time and convenience, has been surprisingly low, and the savings are overwhelmingly worthwhile.