Shrinking Your Cash-Flow Period to Create a Better Budget
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clf Over lunch the other day, my friend Jessica told me she discovered a new idea to help her save more money on a daily basis. She has always been careless with her spending, so it was awesome to hear that she found a method that works for her. I'm paraphrasing, but this was her basic concept:
I used to try maintaining a positive cash flow on a monthly basis, but money is always tight at the end of the month. These days, I take my monthly take-home pay, deduct all my big expenses like rent, and then divide the remaining amount up by the number of days in the month to get what I call the "daily spend limit." Whenever I want to spend money, I just think of my daily spend limit and try never to go over that. I find that I can easily keep it under the limit most days and by the end of the month, I'm pretty much always ahead.
I'm so happy to hear that Jessica found a way to spend less than she earns, because spending within your means is probably the most important personal finance lesson you can ever learn. But why does this work?
1. The Math Makes Sense
Mathematically, you are essentially trying 30 times harder a month when you try to spend within a daily limit. For example, you might end up spending $1,197 a month if your monthly cash limit is $1,200, but if you spend $39 out of $40 every day, you will only spend $1,170 in 30 days.
2. It's Easier to Manage
Breaking up the large monthly budget into smaller, daily amounts is also easier to visualize and manage. When Jessica was trying to conform to a monthly limit, she usually spent more during the first half of the month and started cutting back during the second half when she got dangerously close to the limit. When she doesn't go way out of control at the beginning, she ends up pacing herself throughout the month.
3. It Helps Reduce Careless Spending
When she was working with a bigger monthly amount, each small purchase seemed negligible. However, once she deducts the fixed expenses from her income and then divides that number further into a daily limit, a popcorn at the theater seems like a much more wasteful purchase. If Jessica really wants something, she can buy it, of course, but she's more likely to realize that her life is just as great without eating that bag of popcorn. (It's probably unhealthy and bad for her anyway!)
What Jessica did with her budget is basically divide and conquer, breaking up major projects into smaller, more manageable tasks. This may not work for every person out there, and it certainly doesn't address large purchases. But if you are in a rut with your wasteful spending, why not give this a try?
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Wow, that is a great idea and pretty original. I've never heard this method before. I think it also works if your finances are healthy.
This approach would be difficult to manage. You would need a daily running total. On some days you would not spend anything at all. Is that daily allowance forfeit? Of course, if you did strictly stick to the daily spending limit and did not spend on certain days you would be that much further ahead at the end of the month.
I think the article is really for people who overspend impulsively on a daily basis. If you're a longer-term planner, you can handle a longer budgeting timeframe. Maybe a week would work better.
If you're regulating spending daily, then you have to put yourself in a situation where you can save up for the weekend grocery shopping and other expenses.
For those that have trouble saving, my Father-in-law advocates the "pay yourself first" practice- which is: Treat your saving like a bill. You put this money away first as if you are paying one of your normal bills, preferably in an account you don't have "easy" access to (for example, a savings acct w/ no ATM/debit card attached). Then you don't have to worry at the end of the month if you reached your goal, because you reached it to begin with! This can be especially helpful for those whose money "burns a hole in their pocket".
This has been working great for me. I got the idea from the book Wealth Watchers by Alice Wood. It's so simple, I'm amazed I didn't think of it myself.
I been budgeting for the month and was running into the same problems mentioned above. I had just decided to break it up into 2 week chunks, but after reading this, I think I may switch to 1 week at a time. Every day would have worked really well for me when I was single, but I think I'll start with a week now and see where it puts me. Thanks for the timely tip!