Mind-Manual

Why You Don’t Have to Budget to Manage Your Money

When someone talks about managing money better, for most people that means budgeting. Budgeting also tends to turn people off, and then they don’t even try to manage their money better and just let their finances be managed reactively and by emergencies instead of proactively and consciously.

But, here’s the good news: Budgeting is just one way to manage money. The key to managing your money effectively and consciously is to have a system, and the system doesn’t have to be budgeting. With a system, you can consciously judge each area of expenses and income rather than letting circumstances or your emotions guide you.

There are some things to look for in a system, though, for one thing, it has to provide structure without being too restrictive. Some people feel that managing money will take away their freedom. You also want to pick a system that is decently flexible and won’t implode if you change things a bit. Systems are usually designed with some criteria in mind. Budgeting is designed to create the maximum amount of control, however I feel it takes too much effort to maintain.

Obviously, different systems have different pitfalls. Budgeting, for me, has three pitfalls: 1. I don’t have good associations with it. 2. It can take too much time to maintain if not done properly. 3. It can be a little inflexible if not done properly.

The idea is thus: you need a system that is as unique as you are. You might also have to try to a number of different systems before you find one that works for you.

Here’s a short list of some systems I know of, with the one at the top being the easiest, and most automatic to maintain but still provides a good deal of results (which, in this case, is to save and invest money for financial security and freedom):

0. This is something I feel you should do, period. Get a financial management program like Quicken, or check out Wesabe (free and online and can import bank data). Start using debit cards or credit cards (I only use a good rewards card like PC Financial’s MasterCard and when I have the cash to cover it, I don’t use it if I don’t have cash) when you’re spending your money. You can then go to your bank’s site and download the bank data into Quicken or Wesabe which you can setup to automatically categorize your spending for you. Then, at a glance and in less than 10 seconds, you can tell where your money is going. Monitoring your money is the name of the game and I highly suggest you do this in conjunction with one of the following systems.

1. Save ten percent of every paycheque automatically and have it transferred into an index fund. Many investment accounts and funds can be setup as bills in your account. This technique has actually created millionaires according to The Millionaire Next Door so it works.

2. Broadly slice up your income and your expenses. This is a sort of very basic budget. So, 45% of income may go towards rent/mortgage and so forth.

3. The JARS system.

4. A simple and effective, zero-based budget.

Whatever your financial goals are (you do have some, right?), whether they’re to take a truly care-free vacation, get out of debt, save up a down payment for a house, stop working, better systems for managing your money will get you there faster and much, much easier on both your time and your emotions.

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The 4-Hour Work Week Lifestyle

A retired couple essentially live the 4-Hour Work Week Lifestyle, though instead of automated income, they have pensions. They enjoy the good life on $2000 dollars a month in Mexico. This is strictly a “if you’ve got the time and you want a little motivation for your own journey” article.

Enjoy:

How we retired in luxury — on $2000 a month

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Why People Don’t Manage Their Money

Sometimes someone puts something in such a clear and simple way that you’re struck by the truth of it. For example:

Why People Don’t Manage Money

It has been my experience that people believe managing money will take away their freedom. They believe that managing their money will not allow them to be free and enjoy life to the fullest. I’ve been using the JARS for over a year and can honestly say that I feel I’m in a better position now to achieve financial freedom than I have been in years. In my opinion this is true freedom.

Stephen Martile on Managing Money

I’ve written about this sort of thing recently, where we feel that something is restrictive while it really provides structure. People want to feel in control of their money, not the other way around, which they may feel if they have to feel that they can’t spend a certain amount of money because of some plan. People in general don’t like to feel their freedom is being taken from them. This is where reactance theory comes from, which is when people feel their freedom to make a choice is being threatened.

So, if you’ve been procrastinating on setting up a system to manage your money, now is the time to make the mental flip from a restrictive mold to a tree which can grow leaves and more branches out, out, out forever! Now’s the time. Two good systems are the JARS system Martile is talking about, and a Zero-Based budget from Getting Finances Done.

If neither of those systems work for you, you can always setup an automatic transfer from whatever account you get paid into to a savings account of about 10% of your income. Then invest it from the savings account. This is the 2% of the actions you can take to managing your money that will give you probably 80-95% of the results. Do it. Now.

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You don’t really need to be a millionaire

It is now possible to have a millionaire lifestyle without being a millionaire with the help of modern technology. This has been part of a realization I’ve had recently.

You see, I’ve originally wanted to become a millionaire soon as I could so I could withdraw about $40,000 a year (or ~$3333/month), giving me enough time and money to do whatever I wanted. I was stuck in the time = value = money mindset, though, so my thoughts were focused on providing finite value for an employer (or even, really, myself) where I would get paid essentially by the hour. Lately, though, and mostly through the influence of Tim Ferriss (author of The 4-Hour Workweek) from this 30-minute speech he gave, I’ve come to some realizations:

• The three currencies of personal freedom he talks about–time, money and mobility–are essentially what I’m after with my goal of becoming a millionaire, and
• there are ways to achieve those currencies without becoming a millionaire, and
• I can achieve a substantial amount of those currencies much faster than becoming a millionaire. Rather than waiting about 10 years, at least, I could setup multiple streams of income much, much earlier than that.

This signifies a major change in my financial goals. My top priority is no longer working as hard as I can, for as many hours as I can to become a millionaire as fast as I can (which presented certain difficulties, anyway). My top priority is not building streams of residual, automatic (in the sense very little time is required) income. There are a number of benefits of this new approach that I would like to highlight:

1. Down with frugality!

I don’t need to be as frugal anymore, because I don’t need to put away as much of my income to savings and investments. I currently save around 25-30% of my paycheques. And most of that ends up paying for university tuition anyway.

Since I don’t have to be as frugal, I’d imagine it’d be a bit easier to build an abundance mindset, which seems to be very useful in creating abundance.

2. Enjoy Life!

Since less of money would be going towards long-term planning, I can enjoy life more today, right now. I don’t have to worry as much about small ($10-20) purchases, as long as they’re not totally inane.

3. Totally possible as a student!

As a full-time student, I’m not always available during regular business hours, nor do I have a lot of time in general to go to a job. I am currently searching for a job in the financial sector, but I can only do that part-time. Not being able to work during regular hours seems to be a bit of handicap in finding a job that there are other people (such as university graduates) are just as qualified to do, but they can do it full-time.

4. Still be a Millionaire!

As long as I keep to a minimum of savings–say 10%–I can still become a millionaire in my lifetime. It’s just not the top priority anymore.

As I explore creation of multiple streams of income a number of ideas pop out at me:

• Investing: I already do this and its an excellent way to make money.
• Residual sources of income: Something like writing a book. Once you write it, you’re done. You can write another one or you can update it, or just spend time marketing it every week, but it doesn’t really require a continuous time investment.
• Business sources of income: This is a category that requires investment on a regular basis. The business Tim Ferriss runs, for example. Or this blog. I need to write articles and invest time marketing it (something I would like to get better at) on a somewhat regular basis.

I’ve already started doing something in that last category (other than this blog, which I haven’t started to monetize yet), which is buying tapes for cameras and selling them where I work (we rent out cameras). So, when someone comes to pick up a camera, I can just ask, “Would you like some tapes with that?” (sometimes I’ll ask if they want fries, but that’s purely an amusing accident).

My bibles on this matter are:

• The Interwebs. Especially the stuff about blogging and making money online.
• Multiple Streams of Income by Robert Allen
• The 4-Hour Workweek. The mp3 interview also linked above and other speeches by him I find online, like this one.

Main Points:

• Don’t trade time for money, instead trade value for money.
• It’s possible to have the time, money and mobility you desire now, rather than having to wait until you become a millionaire, financially dependent or retire.

As always, comments are invited and encouraged.

Edit: More quick tips in this short Tim Ferriss interview.

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