I’ve noticed a disturbing (yet recurring) conversation with many RadReaders. It begins with someone in their mid-30s (let’s call them Sam) who’s worked their entire adult life and rapidly scaling the corporate ladder. Sam’s never had to worry about money as an adult, because she’s been on the better side of a simple formula: income >> spending. I use two “>s” because as Sam and her family regularly clear this threshold
But Sam’s got an itch. She’d like to change careers and is considering becoming an entrepreneur. Smart, earnest, and hardworking – she’s got all the tools – but when I ask her a simple question, her calm demeanor flips on a dime:
How much did you spend in 2018?
She has no idea. In her defense, she’s earned the right to not worry. But that doesn’t stop her from worrying about money. In fact, her daily thoughts are dominated by money worries. Sam’s constantly second guessing her every purchase and arguing with her husband about their vacation planning. And this is before the anticipated career change.
If there’s a freedom dividend to be had from her assiduous career, prestigious MBA and years as a high-earner, Sam has failed to capture it.
What makes her so afraid of a spending staredown?
Bring the excuses
Sam immediately jumps on the defensive after hearing the question. Her year end bonus dominates her annual earnings, so her “net monthly spending” is negative. Her spending is lumpy, dominated by a big summer vacation, and exacerbated by the one-off nature of insurance premiums, tuition payments and her charitable gifts. With two young kids and the ensuing costs of childcare, daycare, and upgrading to a bigger car, they haven’t settled into a steady state of spending. Sam tried Mint.com but couldn’t figure out how it works. So the status quo will have to persist.
I call BS. Sam is choosing not to know. And I don’t blame her. I was Sam, a serial money avoider for nearly 38 years.
Back of the envelope math
When I left the corporate world, I earmarked 18 months of runway to figure out the next phase of my career. How’d I come up with my average spending? I took an unscientific average of our monthly credit card bills and paired it with an even more unscientific average of our cash spending and multiplied it by 1.5.
Yet every month, as I moved cash over from a dwindling savings account to fund our spending, my fight-or-flight reflex would go into overdrive. It almost drove me back into the paycheck economy.
The benefits of staring into your soul
My internal angst was best captured by the philosopher Carl Jung who wrote: “Until you make the unconscious conscious, it will direct your life and you will call it fate.” And my money escapism was directing my life in ways that were debilitating. This not only made for a crappy life experience, but clouded my thinking at a time when I needed to be my most clairvoyant self: as a new entrepreneur.
Like Sam, I’ve had years of false start with various budgeting systems and apps. None stuck for a simple reason: I truly didn’t want to know.
The budgeting app with the patronizing name
You’ve heard me praise the app with the silly acronym, YNAB. Short for You Need a Budget (and pronounced why nab) it’s exposure therapy for serial money avoiders.
Once you link up your accounts, it operates with an “inbox system.” Every morning, you have to stare down your purchases from the prior day. The new iPhone, flights for Thanksgiving, insurance payments, and overpriced espressos. You have to acknowledge them with a swipe (and toss them into the appropriate category).
Initially, it’s a tedious and anxiety-inducing exercise. But after a couple of months, the stress dissipates into serenity. The unknown becomes known. And when you spend, you’re no longer playing defense – instead, it’s from a place of strength and confidence.
A gross under-estimation
I’m about 10 months into my YNAB adventure, and I know this is gonna sound like some Kool-Aid drinking BS: I look forward to seeing the transactions each morning. Here are some other discoveries:
- I had underestimated our spending by ~25%, yikes!
- About 1% of our spending was on things we didn’t realize we were buying (mostly lapsed subscriptions to various digital services)
- 10% of spending was on things that brought us very little marginal utility (excessive Uber and even more excessive DoorDash)
- Our big summer vacation was actually cheaper than we had estimated
Without much additional work, YNAB has helped us get clear on two numbers. We could cut our spending on non-essential purchases by 31% within 24 hours; and within a year 36% (primarily from downsizing our home, which we rent).
And to be clear, just because we can cut them, it doesn’t mean that we will cut them. This would only occur in a “stress case” scenario.
Going on offense
The leadership guru Peter Drucker famously wrote: “What gets measured, gets mastered.” And here’s where I’ll admit that I don’t really use all of YNAB’s features – in fact, while I keep a loose budget, I use it more for a breakdown of my past spending (which can be provided by Mint, Tiller or just exporting your transactions into a spreadsheet). But it’s that daily dose of exposure therapy (now an “atomic habit”) that gives us the confidence that we’re on the right track.
So today, we feel good about our spending, letting us double-down on purchases that bring us joy. We’re not afraid of lifestyle creep, because we’re implicitly checking in on it each day – and getting the broader spending trends each month.
So Sam, if you’ve made it this far. You can capture that freedom dividend. Don’t be afraid. Clarity and decisiveness in your finances, will permeate every dimension of your life. And they will compound all the great things you already have going for you.
This piece was adapted from one of the modules in The Fulfilling Path to Financial Independence.