Ascending the Pyramid of Financial Shit-Togetherness: Step #1
Whether or not you remember it, at one point in your life you suffered from a terrible case of fiscal diarrhea. Maybe it was short-lived and by the end of your paper route’s second month, you were budgeting with the best of them. Or maybe it didn’t subside until a few years after college when you decided to get a handle on that steadily increasing pile of credit card debt. Or maybe you’re one of the millions upon millions of people who are living a financial shitshow on a daily basis. None of that matters. What matters is that you’re going to take the first, and most important step toward leaving this phase behind.
Step #1. Learn how you are spending your money and how to make that information as meaningful as possible to you.
The first and by far most important step in getting your financial shit together is to become intimately familiar with how you are spending your money.
I can’t emphasize the following point enough: This step is purely about measuring how you are currently spending your money.
Not creating a budget.1
Not judging whether you are spending too much or too little.
Not making conscious changes.
This is about simply gaining an understanding of how you are spending your money by tracking and recording your expenses. The ultimate goal is to become aware.
1Quick rant about budgets:
Budgets don’t work. They don’t work for many good reasons and here are three:
#1. They aren’t tied to a specific purpose or goal besides “spending less”. There is no “why” behind reducing your monthly gas spending from $300 to $250 other than that it’s less money. The goal isn’t meaningful.
#2. There are too many variables. You make hundreds of purchases across dozens of categories every month, each of which could be under-budget or over-budget at any given time. If you love data, this probably doesn’t bother you but for more well-adjusted people (present company excluded), it can be overwhelming.
#3. They are too paternalistic. I don’t care that it’s a universally accepted rule of thumb to never spend more than 8% of your pre-tax income on perishable produce. You don’t need to follow “tried and true” prescriptions about how to allocate your resources to master your personal finances. Full disclosure: I completely made up the produce thing but you get the point.
The best way to become aware is to record how much you spend each month, organized into logical categories.
The easiest way to pull all of this data together in one place is to use Personal Capital or Mint. They are both free and once you enter the username and password for your various accounts (silence your inner identity theft phobia, they are 100% legitimate sites with encryption as good or better than the sites they pull your data from), they will automatically categorize all your purchases. Once you set it up, it does almost all the work for you.
I say “almost all the work” because I’m going to counter-intuitively ask you to make things a little harder for yourself. Rather than relying on the automated expense categorizations, I want you to make your own expense tracking worksheet in Excel and copy the data over. Both Personal Capital and Mint have a “Transactions” report that lists the date, amount, and vendor for each transaction. There are two good reasons to do this:
#1. The automated categorizations get a little screwy sometimes and manually bucketing each transaction ensures your data is accurate.
#2. In the same way that you retain more information taking notes on paper than on a laptop, building in a small amount of required processing for this data will anchor it much more firmly in your brain and teach your subconscious that it’s important.
I know this sounds like a lot of work. If you’re leery of entering your account information into Mint/Personal Capital or if the idea of tracking every dollar you spend is overwhelming, my compromise offer is the following: Just record what you spend on food for the next month. This includes groceries, eating out, ordering in, coffee shops, and any other time you buy something and then convey it into your stomach.
If you make it through that month in one piece, then add your fixed monthly expenses to the tracking sheet. You only have to find these values once because they stay the same each month. The fixed expenses plus food almost certainly makes up most of your total spending.
Once you’ve made it that far, stop being such a god-damn baby and just go all in.
If you commit to tracking how you spend your money and do so on a monthly basis, you are ahead of 90%+ of the people in this country. You’ve taken the single largest step toward making an absolute mockery of whatever Financial DadBod you once had.
Now you need to make this data as meaningful as possible to you.
The best way to do this is to identify your most powerful personal financial motivator. If you take this last step, it will be like jet fuel poured onto the bonfire that is your financial engine.
Yes, I purposefully crafted the most tortured metaphor I could in hopes that it would catch your attention for this final step. That is how much I care about you getting your poop in a group, financially speaking.
Take some time to get familiar with your data. If you haven’t ever tracked your spending before, some numbers will jump off the screen and punch you in the face.
My wife and I drive shit-box cars because we live close to work and don’t find any particular joy in driving. They are both paid off and our insurance is $110/month combined. So imagine my boiling hot rage when I discovered that two years ago we spent $576/month on car related expenses once you include gas, repairs/maintenance, parking, insurance, and registration. You will have many similar experiences when you first take a hard look at your data.
Next, sort the expenses from largest to smallest to understand them relative to each other. An easy way to make the data more meaningful is to compare spending in each category to the other categories. I guarantee there will be pleasant and unpleasant surprises when you do this.
Now it’s finally time to determine your most powerful financial motivator. This is the critical step that determines your ultimate success. Once you put your spending in context of how it impacts the most important financial goals in your life, your Financial DadBod will have seen its last sunset.
Here are three examples of different financial motivators. Pick which resonates most with you and transform your data as described.
Financial Motivator #1: An instant, big-assed raise
If you are underpaid at work and it’s a constant source of frustration for you, find comfort in the fact that you can deliver yourself a sizable raise, starting tomorrow. Benjamin Franklin coined the phrase “a penny saved is a penny earned” (you’re welcome for the pun), by which he meant that all the sweaty cheese you decide not to spend is cheese that doesn’t have to be earned in the future.
Conceptually he was spot on but these days due to things that didn’t exist in his time like Federal Income Tax, you actually have to earn closer to 1.6 pennies to have 1 penny to spend. What this means is that if you choose to reduce your spending by $1,000/year, you just gave yourself a $1,600 raise! If you eliminate one thing that you are spending $100/month on, that has the same impact on your finances as earning another $1,920/year!
Play with your expense list by reducing or even zeroing out some of the categories to see how much of a raise you would be giving yourself.
Financial Motivator #2: A big-assed purchase like a new house or a boat or college for your kids
If you've got a big ticket item on your list, translate any/all of your expenses into how much money you would have in the future if you invested the funds instead of spent them.
For a monthly expense, multiply it by 173 to see what it would grow to if invested for 10 years with a conservative 7% annual return. For instance, if we invested the $576/month we spent on our cars for 10 years, it would grow to $99,648 over that span of timmmmrrrrrghghghghghhg.
Whoa! Sorry, I simultaneously had a rage blackout and vomited from shame after doing that math.
For a weekly expense, use 752 instead of 173.
Financial Motivator #3: Retiring 10 years earlier than you thought was possible
This post should be required reading for every American adult: https://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/
In it, the country’s most famous financial independence blogger shares the earth-shattering truth that ultimately, your time to reach retirement boils down to one thing: your savings rate, as a percent of your take-home pay.
Think of it like this: if you are saving 100% of your take-home pay, you don’t need any income to cover your expenses, which means you can retire today. If you are saving 0% of your take-home pay, you will never develop any savings and won’t ever be able to retire. Read the post for more detail but first feast your eyes on this table:
Look at how much the timeline shrinks with relatively small changes in your savings rate. Moving from saving 15% to 25% literally cuts 11 YEARS off your required working time!
Do the math to see what it would take to bump your savings rate up 5% or 10% and then look at your spending to see what types of sacrifices you would need to make. Decide whether those sacrifices are worth a few thousand extra days in retirement and a few thousand fewer meetings at the office.
By understanding how a change in your expenses impacts your savings rate, which directly determines how many years you have until retirement, the data becomes much more meaningful than simply numbers on a page.
I want to end Step #1 with a reminder about the importance of approaching your climb up the Pyramid of Financial Shit-Togetherness with a non-judgmental mindset.
You are in the midst of developing a set of skills that will dramatically improve your quality of life. The worst possible thing you can do at this point is to get down on yourself because what you’ve learned about your spending is unsettling or disappointing.
Stay the course and move with me to Step #2, where we will talk about income and where I’ll share the single best way to make your spending data speak volumes.