I’m a firm believer that you should work on your money in ways that matter and make a difference, and then leave it alone.
Assuming that you want to move your money to a better place, I think there are two basic ways to get there:
- Smart money management: tracking, tweaking, reporting, re-balancing, etc.
- Smart work outside of money: looking for a better job, making better choices at the register, creating a new product or business, etc.
The optimum balance is up for debate, but I think it lies pretty close to 20/80, that is–working outside your money in ways that benefit your bottom line 80% of the time, and doing the actual management of your finances 20% of the time.
Last June, I wrote about this very topic when I asked you not to focus on your money.
“It’s the work we do, the habits we change, the will we exercise, and the ideas we implement that drive wealth. The actual numbers are just the results of our efforts, often coming long after we’ve already sown the seeds. So keep sowing, or you might find yourself with nothing to focus on sooner than you’d like.”
Hopefully, we’re on the same page. Money doesn’t start and end with its own management. You have to make it first and you eventually have to spend it–those are the choices that truly matter.
But what do we do with the 20% of time that we devote to financial management? It’s easy to abuse, after all. It’s so tempting to fill the time with feel-good or look-good tasks that actually achieve very little.
The primary culprits are poor task selection (making poor choices to begin with) and excess (taking certain parts of smart money management to the extreme).
Here’s my short list of troublesome personality types when it comes to wasting time with money management:
- The over-tracker. You log into the bank website twice a day and open up Quicken when you’re bored, just to see if anything has changed.
- The market tracker. You track every stock and mutual fund in your retirement portfolio with hour-by-hour accuracy, and your family can tell how the markets did today by your mood at dinner.
- The over-planner/over-charter. The walls of your office are lined with 5-year projections and payment schedules that are outdated as soon as they’re printed.
- The personal finance book reader. Your bookshelf is filled with self-help nonfiction covering all aspects of personal finance, and your RSS reader subscribes to every money blog known to man. (You should, however, subscribe to mine.)
- The checking buffer avoider. You don’t need no stinkin’ buffer. You live on the edge, craving the day when your checking balance comes dangerously close to zero just shy of payday.
- The extreme frugalist(a). You make the guys on Extreme Couponing look like amateurs. Every waking minute is an opportunity to find another deal and save.
- The loser. Instead of keeping your head up, you focus on every hiccup on the road to prosperity, seeing every problem as a sign that you’re heading the wrong way.
- The experimenter. If there’s a money tool you haven’t tried, it’s because your house temporarily lost power in a hurricane. You live for the next new thing that will solve all your problems for good.
- The obsessive filer. Every receipt, invoice, and statement that comes across your desk is meticulously scanned, indexed and filed away for future reference, in case you need to know how many tomatoes you bought in 2004.
In my mind, those are the biggest time-wasters, for various reasons that I’ll get into below. If one of these hits home for you, there’s no shame in admitting it. I’ve been many of these personalities at some point in my life, and it takes a lot of effort to understand why you do something and move past it. We’ll explore solutions to each specific area below.
Let’s begin with tracking:
Part of tracking has its roots in the fact that we want things now. In the modern world, instant gratification through immediate access to information is deeply satisfying to our brains, and we crave new email, new information, new games to play, etc.
I think the other part of tracking has deeper roots. It may be a form of procrastination–instead of facing our problems head-on or figuring out new ways to solve them, we check to see if they still exist. It may be wishful thinking–hoping that things are not as bad as they seemed the last time we looked at them. It might also be an honest desire to act–we want to do something, but without knowing what, we resort to what we know which is staring at the problem.
What’s excessive? How can we tell if we’re over-tracking? How do we fix it?
- Start with the minimum–what’s the least amount of financial management you can do and make little to no difference in where you end up? 1 hour a week? Less? It might help to experiment or to challenge yourself to less and less time each week. Keep your personal benchmark in mind.
- When you lay out your big goals and plans, make it count, and spend the time. But do it once–when you follow your plans, don’t fall into the trap of revisiting them at every opportunity. Sure, revisit them, but only when it’s absolutely necessary.
- Come up with a simple procedure for money management. When I check in with my money, I need to do X, then X, then X. Put time estimates if you have to, and schedule it (preferrably at the minimum frequency you discovered above). When you sit down to work on money, get it done and get out.
Tracking, checking, following, tweaking, transferring–all of these can become addicting and keep you from the real work that gets you ahead with your money.
The Market Tracker
If you own any kind of investment at all, you have to decide where you stand. Are you an active investor or a passive investor? I strongly believe that 99.5% of us should be passive investors. That doesn’t mean we roll over and play dead, but it does mean that we’re not in the day-to-day business of trading stocks, we don’t tweak our portfolios every week, and we don’t (for the benefit of your entire family) track the markets live.
There is a lot of investing research being done and some of the recent findings include the following:
- “Index” mutual funds that are essentially automatic can perform just as well and many times outperform funds that are managed by a human being in the long term. Both can also very often outperform “stock pickers” that single out individual investments to pursue.
- One of the best predictors of how a mutual fund will do in the future is not its past performance, who runs it, or even how much it has of what–it’s the expense ratio, or essentially the percentage you pay to own the fund. Research is showing the lower this ratio is, the more you’ll probably make. The cheapest funds (I recommend Schwab and Vanguard personally) charge a fraction of a percent in fees. For others, it can reach 1, 2, 3 percent or more.
Whatever your approach (after you’ve consulted with an investment professional, of course, because I’m not giving you any advice here), it’s important to remember one thing: money in the market is made over decades, not days. The 5% run today is not a cause for celebration, and the 3% drop tomorrow is not a cause for panic.
Some advice from over-tracking might be useful here–spend the time up-front to carefully select (“curate,” if you will) the right investments, the right account types, the right approach. Then automate, check in once in a while, tweak only when needed, and keep your eyes on the horizon.
I love, love, love planning. If I would do something else for a living, it would probably be organizing people’s closets, setting up their budgets, or forecasting economic trends. There’s a certain freedom about looking into the future and imagining it as different and better (sometimes much, much better) than it is today. There’s also hope, optimism, momentum, and a lot of other things that make us generally feel good about ourselves.
Then reality hits, and it turns out we over-estimated our discipline, under-estimated the hiccups, and we fall a little short or sometimes fail miserably. That’s okay though, because we can just make a new plan and it makes us feel a whole lot better again.
There’s a better way. Yes, planning is essential and goals are (or I should say, can be) motivational and equally essential to getting somewhere. How do we plan and set goals, chart and track all of this overwhelming information without going overboard? Here are a few tips that have worked for me:
- Determining what’s essential. Chances are that out of everything in your financial life, there are a handful of things that make or break you, or that really keep your finger on the pulse. Personally, I track only three things–net worth, which tells me if I’m making progress, checking cash flow, which tells me if I’m managing my accounts well, and my food budget, which has historically been a problem area. While everything else is also relevant, it’s not nearly as important as these three numbers. If I’m doing well here, chances are I’m doing well elsewhere, too.
- Long-term goals. Short-term targets. For example, one of our big goals last year was to buy a house, something we’re still working on right now. That was the overall vision, the long-term goal. Setting a goal for how much to save by the end of the year to fulfill this goal would have been fruitless: aim too high and I would have been demotivated the entire way, aim too low and I would be equally less inclined to make hard choices and save more. Instead, I set targets to reach every month. “Based on what’s going on right now, I want to be at $X by the end of the month.” It’s adaptive, short-term goal setting that fits into the larger framework of a vision.
Planning definitely makes you feel good, but don’t let planning take center stage from the awesome feeling you can get by actually making progress!
The Personal Finance Book Reader
Personal finance can be addicting, just as any kind of self-help material can be. These books generally present elegant solutions to problems that are universally painful and frustrating to most of us. Most of them also tend to use the same concepts but package them in ways that make them appear unique.
In self-help, it seems the pre-requisite for writing a book is taking these concepts and inventing your own “vocabulary” for it to make it sound new and interesting. And so authors come up with new buzz words to give legitimacy to their work. Don’t get me wrong–some of it is fantastically useful and genuinely original, but the truth is most of it is rubbish.
What new self-help does manage to do (and this is the case for personal finance books, too) is give you new perspectives. The way one author explains a subject might really hit home for you, while the same subject elsewhere just falls flat. Having said that, there are only so many ways to skin a cat.
So without saying much about it, I would just say that after reading 5 or 10 personal finance books, you have essentially read them all. Put them down and try to actually apply something you’ve learned to reality and you might find out that you get good results.
If you get outstanding results, you can always write you own book on money…
The Checking Buffer Avoider
Without a doubt, an adequate checking buffer is a time and gray-hair saver. With money in the bank, you can spend less time organizing and timing bills, less time checking balances, less time moving money around, and generally less time managing your daily finances and more time engaging in meaningful budgeting and planning.
The idea of a checking buffer is simple–instead of treating $0 as the “floor” of your account, you make it some other number. Some start with $500 or $1,000; others make it an entire month’s worth of income. Whatever it is, it becomes your account minimum.
Now you can treat your account as a zero-based budget. For example, if your checking buffer is $1,000 and your balance is $1,800, you really have only $800 available. If you need $200 until your next paycheck, you can immediately transfer the other $600 to savings, without worrying if you’ll spend $195 or if you’ll overdraw your account by spending $205. The checking buffer is there just in case.
It works especially well for us because many of our large bills tend to be paid out around the 1st and 15th of the month. If there is a problem with our direct deposit (or if we don’t have time to run to the bank to deposit a check), we know we’re temporarily covered for most transactions.
If you’d like to take this recommendation, start with a nice round number (even if it’s as small as $100) and consider it your checking floor. One trick I use is a “savings goal” in Quicken, which actually distorts my balance in the account view by the buffer amount so that I never see it and never consider it.
The Extreme Frugalist(a)
Frugality is a fine line, and a personal one at that. You can live very efficiently and at a very low cost and be perfectly happy. You can also drive yourself so miserable that everyone else will wonder “What’s the point of all this?” We are all frugal to some extent, because none of us actually spends however much we want on whatever we want. We all make decisions about what we should and shouldn’t buy and try to find the best deal around.
The problem comes in when this cost-cutting and deal-chasing becomes an unhealthy obsession:
- Your time may not have a dollar value (such as an hourly rate you lose for every hour you cannot work), but it definitely has an opportunity value.
- If you’re doing work related to frugality (shopping around, cutting coupons, etc.), you’re not doing something else you value.
- When the value of that something else exceeds the value of what you get by being frugal, you have a life balance problem.
For some people, the value of extreme frugality will take center stage. Those are the people that end up starting blogs and TV shows and do interviews for the local paper to teach us what they’ve learned. Learn from them, of course, but realize that unless you’re willing to put in a lot of time and effort, your results will vary.
The loser is the pessimist, always seeing the bad side of whatever comes along. Instead of focusing on the horizon, the final goal in mind, and anticipating roadblocks along the way, the loser will interpret every problem as a sign of a poor choice of goals or as an excuse to fail. A negatively-focused attitude is like the resistance in many ways, trying to do everything possible to get us off-track. Like the resistance, the harder and more worthy the goal, the more opportunities there will be to think you’ve failed and quit.
A recent business speaker taught me an important lesson on crisis: in Chinese, the word crisis can be interpreted as a combination of the words “danger” and “opportunity.” Too many of us choose to focus on the danger and too few are looking for the wonderful and numerous opportunities that lie just beyond every problem. We forget that every crisis we get through successfully is a crisis that makes us stronger.
We also forget that no road to opportunity and success is a straight line, or a simple path we can outline and follow. There is always give and take, always two steps forward and one or two or maybe even three back. The most important perspective is the long-term perspective, so I encourage you to keep your eye on that instead. Don’t lose!
I love playing the experimenter, but at least I’ve found a paying outlet for it with this blog. Even in my role, I have to be careful about keeping new tools and strategies in my money lab, or they threaten to mess with my established money ways and means.
Experimenting can often come out of pure curiosity or genuine interest, but more often it’s born out of a subconscious need to solve a problem. We believe that the next new tool, system, money guru or new perspective will finally do it for us.
Sometimes, we’re actually right–trying things like envelope budgeting with YNAB has completely changed the way I budget forever. Other times, we’re just going through the motions and excitement of something new, and it’s a big waste of time.
I strongly suggest limiting experiments to just a few each year, and using the money lab approach whenever possible.
The Obsessive Filer
For the longest while, I had a compulsion to keep every paper that crossed my desk for eternity, “just in case.” With the advent of rapid scanning and cheap hard disk space, this compulsion became worse, and also more justifiable (another PDF file won’t hurt anybody, right?). Reinforcing this was the odd phenomenon of always needing something right after I had discarded or deleted it from my life.
It wasn’t until I learned to let go of the need to file everything that I actually learned what I should and should not keep, and for how long. Once I figured that out, the systems took care of themselves and I spent only a limited amount of time every month doing the record keeping associated with scanning, naming, and filing away things that I know I’ll need later.
Do an inventory of your own life–are you filing too many things? Maybe you’re not filing enough… Do you find yourself with too many files that you never look at, or are you constantly trying to find something you know you once had? This should give you a clue to whether you need to file less or more.
I strongly recommend some version of the following system, which has worked great for me:
- All papers, mail and such goes into an Inbox that I go through and act on regularly.
- Once papers are dealt with, they are either tossed/shredded, or go into a keep/file pile.
- At the end of the month (sometimes twice a month), I go through the keep pile. At this point, I realize another 25-50% of these papers are no longer necessary and toss them too.
- Everything else is scanned in using a fast scanner and filed away in a reference folder on my computer.
- About 1% of my scanned files are so important that I need to keep the hard copy. These are filed in my safe deposit box (which is purposefully small, so I need to be selective).
Filing fills a deep need to be organized and prepared for many people. But life is about so much more than filing in the end…
If you recognize yourself or a loved one in one or more of these personality types, the time to take action is now.
- Figure out why you do it.
- Don’t rationalize, but instead dismiss the why as unreasonable.
- Figure out a better way to do it.
- Start. It will be hard, but start.
A future with more time, energy, and ironically money waits for you on the other side when you stop worrying about things that don’t matter.