Is Just Leaving Some Slack Better Than a Plan?

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Are you as tired as I am of personal finance sites saying that you've got to have a plan? If you're a planner, it's unnecessary advice, because you've got a plan. If you're not a planner it's pointless advice, because you're not going to make a plan anyway. And that's okay, because just leaving some slack can be as good as making a plan.

Your natural planner has a plan for how he's going to spend his money. He knows how much money he's got. He knows what he wants to buy. So, he makes a plan for getting as much of what he wants as possible with the money available. (That particular sort of plan, by the way, is called a budget. It's a useful tool.)

Your play-it-by-ear guys, on the other hand, tend to have some slack in their non-budgets. (If they don't, they tend to find themselves at the end of the money before they run out of month. Let that happen a few times and they start leaving some slack.)

If things go just about as expected, your planner has a slight edge. He'll have planned to have a surplus and targeted that surplus to specific savings and investments. The guy who just leaves some slack tends to reach the end of the month with a little money left — but without a plan for that money, anything might happen. The money might get spent. (It was "extra" after all.) It might get saved or invested. Most likely, lacking any plan, it'll just hang around in the guy's checking account. That puts the planner ahead by whatever he can earn by getting his surplus into superior savings and investment vehicles sooner.

When things don't go as planned, though, your play-it-by-ear guy may have an advantage.

If you're a planner, and things don't go according to plan, you've got a problem. You've probably allocated every penny to some category or another, so, if some of those pennies don't show up, there's no slack to allow for a smooth adjustment. Unplanned expenses obviously screw up a plan, as do rising costs for any of the planned expenses. If you don't have any slack, you're stuck with a broken plan.

Now, the actual adjustment is about the same in either case. An unplanned expense can be covered with your emergency fund. Changing prices prompt the obvious adaptations — you substitute for things that have gotten more expensive with things that haven't gone up so much and, if necessary, you buy less over all. But your planner has to do all that plus come up with a new plan. When prices are shooting up every month, that can turn into a lot of extra work.

The guy who relied on slack can usually just adapt in place. Over a period of a few months, he finds that he has a lot less slack than he'd expected, so he cuts back, buys less of the stuff that seems to have gotten expensive, and gradually reestablishes a comfortable amount of slack. He makes about the same adaptations, but he does it without all the extra planning and re-planning.

My point isn't that plans are bad (or good), because you're either a planner or you're not. My point is that you're making pretty much the same adaptations either way.

If you're a natural planner, though, there is a way to keep the advantages of planning without losing the advantages of just leaving a little slack in your finances. It's called contingency planning. I'll talk about that in an upcoming post.