Most people try not to think about money. It’s like the elephant in the room and only addressed when at a tipping point. It’s only when the bills are late, the checking account registers zero, or the realization of nearing retirement, that money moves to the center of attention. While I’m a big fan of advanced technology, I believe this has played a major role in the further disconnect between us and our daily expenses. Just the other day, I mentioned to my college students that I was teaching my children how to balance their checkbooks. I’m not kidding when I tell you that they asked what a checkbook was and questioned why anyone would do that. Make no mistake, I don’t teach the low end of the college rung but the best of the best. These are kids who are headed to high-paying corporate jobs. On one hand, I can understand their inquiry. If I have an app on my phone that shows my current bank balance and I can easily pay for almost everything via a swipe of my card or my phone, not to mention e-checks for those annoying bills that still require an actual check, why on earth would I need to become more connected with my money? Aren’t we more connected than ever?
The problem with this approach is that it is far too micro and does not allow for any high-level thinking, or more importantly, high-level planning. In my experience, it is this high-level view that is absolutely essential for financial progress. If you do not become intimately involved with your finances, you will not make any progress at all and will find yourself in the same predicament each and every passing year. While this could be as extreme as missing a house payment or not having money for groceries, it could also be poor planning for your future and your ultimate retirement goals.
I remember my first experience of becoming intimately involved with my money and developing a spending plan. I was out of college and was in the midst of starting my business. I had a set amount of money saved. It was very clear that, if I didn’t watch every single penny, I would soon find myself homeless. A funny thing happens when something becomes so serious that the only option is to buckle down and become obsessive. It was really quite simple. The odds that my business would be a success, much less flourish, were stacked against me. At the time, I had no formal training in personal finance; and, while I was pretty good at developing investment strategies, forget it when it came to budgeting.
I remember sitting with a piece of paper and, at the top, I wrote “Budget.” I began writing down everything I could think of, such as my mortgage payment, cable bill, car payment, etc. Anything that I knew was a mandatory fixed payment I wrote at the top. Then it became a little harder. I knew I had bills, such as utilities, groceries, etc., but I had no idea what number to write. I tried to go back to my bank statements to see what I had spent, but it seemed to have no consistency. I quickly became discouraged and went for a run. This is stupid, I thought, I’m an adult now, and I don’t need some budget. I’ll just watch what I spend and not eat out so much. Maybe I’ll stop going to the bar with the boys on Friday and I probably could drop that gym membership. The more I thought about these ideas, the more confident I became thinking that I could do the planning without some budget. But, a little voice deep inside keeps saying, “Stop lying to yourself.” I decided to put the budget plan on hold and try this ‘new responsible me’ the following month. You may be surprised to learn that I nailed it! It worked absolutely perfectly- for all of about 48 hours. The big game sparked an impromptu gathering where I supplied the food and beer. My buddies told me they’d chip in; but, suddenly, had amnesia when it came time to pay up. The next weekend was a three-day weekend with the opportunity for a quick jaunt out of town. I jumped at the chance. You know what was interesting about this? Each and every time I made these decisions, not only did I have no real idea how they were impacting my overall finances, I rationalized and justified each and every expense as something I wouldn’t be doing again or as some ‘abnormal’ occurrence. I don’t remember exactly but, my guess is that somewhere around the 25th day of the month, I was toast. I was out of money with more months to go. ARGH. Oh, and it was one of those pesky 31-day months, too. Those are the worst! Once again in desperation, I sat down and revisited the paper that I had started one-month prior. I repeated the process and ultimately found myself running out of patience….again. Then it hit me.
How could I possibly develop a budget if I had no real idea what I spend? What if I started tracking every thing I spent in order to develop my budget? This type of system was not foreign to me because I had learned that it was what companies did in order to accurately forecast financials for following years. In fact, the irony that dawned on me was the absurdity of a company that chose NOT to track its expenses. I remember that the idea was so simple, yet hit me like a ton of bricks. In order to do this I needed to treat my personal financial house like a business. I needed to be my own CFO!
While I still had no budget, I felt better that I had an actual plan. With renewed confidence I was able to get through the end of the month, barely, scraping by on Ramen and a limited social life.
When the new month began, I was ready to get busy. I figured that before I could even begin to limit spending or create some sort of spending plan, I had to know exactly where my money went. Now here’s the thing; I didn’t download some app (there was no app store), nor did I develop some spreadsheet, or even introduce a computer to help me at that point. Nope. I dusted off an old spiral notebook and started tracking. At first, it was easy, and it became a nightly ritual. Before I went to bed, I wrote down everything I had spent money on for the day. This required asking for receipts at each and every place I went, which sometimes was a pain; but, at that point, I didn’t care. I made a rule: no sleep until this was done, it was that simple.
A funny thing happened, as I began to do this, I immediately found myself more conscious of what I was buying. I can’t really explain why or what happened, but there is no question that, by tracking my money on a daily basis, I had this new connection with my funds that made spending money much more emotional. Each time I considered spending money on something foolish, I knew that later that evening, I’d have to write it down. In the moment it was easy to justify; but, I knew that later that night, when the buzz of the immediate pleasure wore off, it would be much more difficult.
In subsequent blogs, I’ll discuss where this process went. I believe that it is important to know that, to this day, I manually track each and every dollar I spend, in a Google spreadsheet. I still ask for a receipt everywhere I go (even at Starbucks where the default is no receipt at all), and every couple of days I input these expenses and update my budget. And, believe it or not, I use this process to balance my checkbook. That is, I use this process to know, at any moment, exactly where I stand with our family’s financial situation. The subsequent budget that evolved had its roots in that very start 20 years ago and is the catalyst for any and all financial goals we’ve achieved over the years.
A new month is coming. If you want to start down this path, start tracking those expenses and check back for more!