About 6 months ago, I started making a decent income in my business. And after a decade of living lean in my 20s, I started spending more too. But something funny happened. For all the extra money I was throwing around, I wasn’t really any happier. In fact, I actually felt less in control of my finances than I had before, despite making more money. Maybe you’ve experienced the same thing.
If you’re like me, you were probably wondering, “Is this how it was going to be from now on? Working hard, making more money trying to get ahead, and then spending it faster than ever?” I felt like I was just spinning my wheels. At this rate, I could go broke making a million dollars a year! No thank you!
At the same time, there’s nothing wrong with enjoying your money. In fact, one of the key tests of whether your money is doing its job should be, “is it helping me enjoy my life?” And my money wasn’t helping me enjoy my life. I was running very quickly into diminishing returns. I found that more and more expenses kept cropping up. It was never just $10. It was $10 there, and $10 here, and $10 more, and $10 more. There was no point at which the universe said, “you know what? You’ve spent enough, the rest of this month is on us.”
As a result, I drafted a new system for managing my money to bring it back into alignment with my goals, as well as help me feel okay with spending money frivolously once in a while.
It’s been working really well. Not only do I feel more secure about where the money is going, but I’ve found that it has become it’s own, fun, manageable game.
Here’s What I Do:
First, I picked a monthly spending goal that I felt was possible, but would require me to make conscious choices about what I spend money on. Then, I converted that target amount from monthly to weekly, and set up a weekly transfer to my checking account for that amount.
Now, your numbers will vary depending on your situation. I only share my figures to provide a specific example, but keep in mind that unless you’re a 30-year-old financial planner whose name is Nicholas Pihl, your numbers will probably be different. Each Monday I receive $350, and it needs to last until next Monday comes back around. I’m free to do what I want with it. However, it needs to cover utilities, car payments, groceries, gas, and anything else that comes up, besides the mortgage.
For larger, infrequent expenses, I set up a separate deposit of $500 per week into a savings account. This is the account that makes home and auto insurance payments, retirement contributions, and pays property taxes each fall. The purpose of this account is to help me avoid a cash crisis in November when these expenses come due all at once. Plus, knowing that all these fixed expenses are taken care of leaves me free to enjoy the rest of my money throughout the rest of the year.
What’s Working So Far:
First, it’s really made me watch where my money is going each week. A lot of my lifestyle creep had come from small, one-off expenses ($10 here, $15 there), which I ignored because no single purchase was going to break my finances. However, once I started using my weekly system, I saw that all these “negligible” expenses had become their own budget category, “Unknown Incidentals,” worth roughly $200 a month. Yikes.
With this system, though, the “Unknown Incidentals” category shrank to a trickle. It made me a more conscious, patient consumer. Rather than swing by Taco Bell for a snack, for instance, I let myself just be hungry for an hour, knowing that it put an extra $10 in my pocket. Weirdly, it doesn’t feel like much of a sacrifice. In fact, I feel happier and more in-control of my life than ever.
It’s also a lot of fun if I have an inexpensive week and hit Friday with $150 unspent dollars. Remember, it only has to last until Monday. Maybe I take a friend out to dinner, or host a barbecue. Or maybe I book myself a golf lesson, or try one of those sensory deprivation tanks. Doesn’t matter. It’s about freedom to be frivolous.
The Downsides:
This system can be a little rigid at times. This past Friday I was adding up my expenses for the week and found that I only had $5 left for the whole weekend. Now, I wasn’t exactly about to starve or anything. But I’d hoped to go out for lunch and beers with some of the guys after our pub league hurling tournament. Instead, I improvised and grabbed a $2.10 coffee at 7/11 on the way to the outdoor pub (where drinks are $6), and called it good. Would it have been more fun to drink beer and get a bite at the food truck? Yeah, but the difference wasn’t as big as I would have thought. I still had a good time with some buddies, and got a learning experience from it. Namely, don’t spend $45 going out on Friday if it means you can’t spend $15 on Saturday.
The other downside is that just because you’re transferring $350 in each week doesn’t mean you’re free to spend that full $350 each week. Some monthly bills, like car payments and utilities need to be converted manually into weekly expenses. For instance, a $350 car payment, and $150 in utilities bills make $500 total each month. Divide by 4, and you find that those two expenses use up $125 of your weekly budget. So in this example, you can spend $225/week apart from your utilities and car payment.
(Yes, I know that technically the weekly amount is $115 since some months have 5 weeks, but I don’t want to have to keep track of which months have 5 weeks, and whether I’ve built enough of a surplus in those months to cover the 4 week months. Headache.)
How to Actually Implement This:
Whether you have merged your finances with a partner or not, this is pretty straightforward to implement. Too, it’s pretty low maintenance once it’s up and running; you don’t have to reinvent the wheel every 6 months.
You’ll need a total of three bank accounts (4 if you have a partner).
The first of these accounts receives all your household income. We’ll call this “The Hub,” because it receives money from all your different sources, and distributes it out to where it belongs. This is also the account that makes mortgage payments. If you’ve merged finances with your partner, this account receives income from both of your paychecks.
The second account is called, “The Vault.” Most of us have a few major cash flows that we pay annually, such as property taxes, IRA contributions, auto and home insurance, and vacations. This is also a good account to save up for projects like home renovations or a new car. And, of course, it holds your emergency fund. The point of “The Vault” is to make sure all near-term expenses (12-18 months) are accounted for and funded. For me, this is the account receiving $500/week.
Thirdly, you’ve got your “Spending” account (and your partner’s, separate spending account). This is the account that pays your day-to-day living expenses. The purpose of this account is helping you enjoy your money. You don’t have to worry about upcoming expenses when you look at this account. Every dollar here is yours to spend, although I recommend keeping a minimum target balance for peace of mind. Keep score against this balance, not against $0.
If you have direct deposit from your employer(s), make sure that all deposits are redirected into your “Hub” account. Also make sure that the Hub account is making mortgage payments as scheduled.
Once you have these accounts set up, decide how much will be coming out of your Vault account next year. Again, this is property taxes, insurance, retirement contributions (aside from your 401k), vacations, and any major upcoming projects. Divide that number by 52, and that’s how much needs to get set aside (minimum). Also make sure it has enough of an emergency fund for your situation. Then, schedule a transfer for Mondays, repeating weekly, from your “Hub” account to your “Vault” account.
Next, evaluate your current expenses, and pick a weekly spending goal. Like all good goals, it should be realistic and just a little bit of a stretch. You can always adjust it later, so just pick something as a starting point. Keep in mind, too, what other monthly payments you need to factor in, divided by 4 to convert them to weekly expenses. Then, schedule a transfer each Monday, repeating weekly, from your “Hub” account to your “Spending” account.
After this is all done, you should be receiving weekly deposits into your checking account. Congrats! Now it’s up to you to spend it. I find that the combo of a 3×5 index card and banking app is surprisingly powerful for tracking and evaluating expenses throughout the week.
Lastly, once everything is set up, take some time to review your system every 6 months, or whenever your financial situation changes. You might start a new job, or get a raise. You might develop new goals that require a change in your savings rate.
What I’ve learned:
I thought I was making “a lot” of money, relative to my own past. But my surplus cash disappeared incredibly fast. Moreover, it did so without touching any of the life goals I’d set for myself. That was pretty disappointing for me, and it provided great motivation for me to get organized again.
There’s not a magical point you can reach where you no longer have to think about money. This is a trap that a lot of people fall in, including myself. In fact, this is probably why lottery winners frequently spend through all their winnings, why Nicholas Cage did the same thing with his fortune, and why “dynastic” wealth rarely survives the great-grandchildren. We just aren’t good at distinguishing between “a lot” and “infinity.”
I also learned there’s a big difference between feeling in control and hoping for the best. When I was “hoping for the best,” I rarely opened my banking app, I didn’t worry much about prices, and I spent like a pirate on shore leave. It wasn’t really that peaceful. Then, once I started this challenge for myself, I got pretty disciplined again. I even enjoyed it because it became a game to me. I’d check in with myself every couple days, “how much have I spent, how much is left, what’s that leave for the rest of the week, how much gas do I have?” Far from being stressful, it became entertaining, like a puzzle.
It’s valuable using a number on the low side of what you think would be comfortable. If you “fail” and go over budget, that’s okay. You just take it for the learning opportunity it is, make adjustments as necessary, and use some of your unspent funds from elsewhere to cover the difference.
The other benefit to “living lean,” is that it’s accelerated my progress towards my medium term financial goals, such as a 2500 sq ft house with a view of the sunset, or building up enough of a taxable portfolio to pay for a $6000 vacation abroad each year. I’m not just being frugal for frugal’s sake. There are some really cool experiences and lifestyle goals I want for myself, and it feels good moving towards them. Moreover, these are more important than a lot of the things I spend money on day to day, and I feel like they’re finally getting due priority with this mechanism.