Within the LWYM framework, Living represents the Wants that you are purchasing. It is important that we actively manage the Living section to ensure that we are able to make ends meet now and still have the ability to save for our Future Happiness. It is by far the most difficult category to manage. When money is tight and we are feeling that we don’t have any choices the drive to “live a little”can become overwhelming. Budgeting feels like we are depriving ourselves of any enjoyment in life, and when the pressure builds a strict budget will snap in a sea of Living related excesses.
This tendency to splurge on ourselves isn’t limited to a scarcity of money either. When we get a promotion we convince ourselves that any extra Living purchases are a reward because we “earned it”. Or when trolling Facebook and seeing all of our peers Living it up, we justify additional purchases with thoughts of “competing with the Jones’” or “FOMO” (for those following along at home – “Fear Of Missing Out”). Humans are very skilled at justifying Living purchases, enhanced by the rush of immediate gratification.
Traditional budgeting often fails because of this one category. But YMOYL has provided us with the framework to approach the Living section of our spending and make informed spending decisions. But to apply this framework we need to monitor our spending first. By tracking every penny into and out of your hands you start to see where everything is going. As YMOYL teaches, you take a look at your monthly spending by category and use your Real Hourly Wage to measure your spending in Hours of Your Life Energy. Then assess each category’s Life Energy cost against the pleasure you derived from it. And make note of which areas you want to reduce spending, and which you want to increase spending.
In this way you can reduce overall spending without ever feeling like you are depriving yourself. By cutting spending that doesn’t bring you joy, and maximize spending where it does, you feel like you are living a luxurious lifestyle while saving more.
Tracking your spending, and doing a monthly analysis against your enjoyment, gives you the ground work to really take your Personal Financial Journey to the next level. You are now able to estimate what your monthly spending will be for each category. Instead of budgeting you can forecast your spending by category. As time passes you will identify expenses that are infrequent or periodic, such as quarterly bills, property taxes, license plate renewal costs, etc. Instead of surprising you when these expenses occur you can anticipate them and save in advance. This approach is “expense accrual” or pre-saving. For instance if you have a $120.00 expense once per year, you can save up $10.00 per month so that when the bill comes in you already have the money set aside for it. This not only makes sure you can easily meet your payments regardless of their frequency, but you “even” out your month-to-month expenses. This evening out process normalizes your expenses and builds another layer of Buffer into your finances.
Now there are many ways you can go about tracking your spending, but the most important part is finding a way that works for you. I started out tracking my spending in a spreadsheet. But after a few months I found myself waiting longer and longer to update my spending, until I eventually couldn’t remember where everything had gone. A process that isn’t sustainable, isn’t practical nor useful.
There are many different programs, apps, and websites that offer to help you with tracking your spending. Personally I am a huge fan of YNAB (You Need A Budget). Don’t let the name fool you, it isn’t a traditional budgeting approach. They have a method of tracking that relies on 4 Rules: 1) Give Every Dollar a Job; 2) Embrace Your True Expenses; 3) Roll With The Punches; and 4) Age Your Money.
Personally I am using their previous version, which was aimed at a more mindful approach to tracking your spending. My version does not have a way to import data from your various accounts electronically, but the newest version does. And my version didn’t age your money in the same way; it would take all income this month and only make it available for allocation next month. The new version also comes with a monthly fee model instead of a lump sum purchase. Regardless of the differences it is a wonderful approach to managing your finances.
By having access to YNAB on your smart phone you are able to capture and categorize your spending as it is happening. While I am waiting for change from cash transactions, or awaiting the confirmation for credit card transactions, I can quickly capture the details and forget about it. And this habit is ingrained for me because my phone case is my wallet. When you are reviewing your bank accounts and credit card statements online, using your desktop or laptop computer, you can verify against your YNAB balances as well. Any device you have allows you to interact with your personal financial data.
Despite the last three paragraphs of fanboy outburst, this is NOT a paid advertisement for YNAB. Feel free to check out other options to see which one works for you. Some people find MINT to be helpful, and if you are in the United States I have heard great things about Personal Capital. (P.S.: Personal Capital, if you are reading this…please come to Canada!) The important part is actively tracking your spending and becoming more mindful of the choices you make everyday.
There are many expenses that are attributed to “Adulting” (for the non- Millennial portion of the crowd – “Being a Responsible Adult”) which are a huge drain on your finances and provide little to no enjoyment. Feel free to eliminate these expenses entirely. Owning a home before you are 30 isn’t a requirement to be an adult. Having a wife / husband, 2.5 kids and a handful of pets doesn’t automatically secure your status as an adult either. But being good with your finances totally does.