Shrinking Your Cash-Flow Period to Create a Better Budget
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?