For Christmas I was given a copy of Scott Pape’s recent book, the Barefoot Investor, and we decided to try and implement the financial plan that he outlines. There were a lot of suggestions in the book that aren’t particularly new – eliminate credit card debt, automate your financial plan, etc. – and we had already implemented a lot of them. What differed were the particular ratios and details in the approach.
Our family’s financial situation is currently experiencing a lot of change, so it seemed like a good time to set new, positive habits before the passage of time adds a layer of difficulty that we don’t particularly need. We began by breaking down our income and dividing it according to the guidelines in the book:
- 10% goes to a splurge account. A new haircut, beer with friends, or that morning coffee that makes life worthwhile? The money for that comes from this account.
- 10% goes to a smile account. A new car, going on holiday, or whatever bigger goal makes you giddy with anticipation? This is the account where you watch that dream come closer with every pay period.
- 20% goes to a fire extinguisher account. Paying off credit card debt, saving to buy a house, or putting out some other sort of financial fire? This is the account where you hose down your financial problems.
- 60% goes to a daily expenses account. Think rent, food, and other items that are really boring until you suddenly can’t afford them.
- There is an additional account, mojo, which is a savings account at another bank that you never look at. This is where any unexpected windfalls or bonuses go. For us that will be overtime payments, tax returns, or the money from selling things we no longer want or need.
I contemplated this account structure for a few days, and thought about the ways we have made financial mistakes in the past. We tend to cruise along well week to week, but then a big bill comes in that we have forgotten is due and suddenly we’re scrambling to cover the cost. To solve this problem, we changed our structure to the following:
- 10% goes to the splurge account.
- 10% goes to the smile account.
- 20% goes to the fire extinguisher account.
- 50% goes to our daily expenses account (down from 60%).
- 10% goes to a big bills account. This will be for things such as annual insurance payments, car registration and repairs, or surprise medical bills.
- Bonus income still goes to the mojo account.
Calculating the amount of money to funnel into each account was easy, and setting up the automatic transfers only took a few minutes. The money moves before we see it in our main account, so there is no risk that we will spend it on the wrong things without thought. Our plan essentially implements itself, so all we have to do is keep each account to its intended purpose and it will work.
For me the most fascinating element of the new plan has been the emotional response from my partner and me. I think the new plan is great, because I can see how we will eventually meet our goals if we just stick to it. All those questions about “how will we do x?” come with a simple answer: we wait. I don’t have to ask if I can afford to do something small and fun, because I can just look at the balance of our splurge account and compare it to the cost of what I want to do. There is no longer a trade off in my mind between eating at a restaurant and paying the phone bill. It is the ultimate in financial freedom.
My partner, however, is not riding the same emotional high that I am experiencing. We have a lot of years behind us where we have enjoyed the alternative freedom of consolidated revenue. Until now we have worked towards one goal at a time, so achieving the next goal felt much easier and was faster. Waiting for things that were once satisfied immediately can chafe and feel restrictive.
It will take time for us to see how the financial structure plays out both mathematically and emotionally. Will we stick to it, or will our old habits push us away from this new approach? No matter how perfect a plan seems to be on paper, there are human factors that are difficult to account for. Unlike past plans this one isn’t asking us to cut out hot chocolate, new shoes or evenings at the movies, which I think gives it a higher chance of working. It will be fascinating to see if our perception of ourselves as mathematical, logical people wins out over our impulsive and frequently irrational selves.