I pretty easily glom my free floating anxiety onto money worries when I lose touch with my One Number. In my case ignorance breeds fear. (I can be a Scaredy-cat.) I’ve seen even more often that ignorance breeds denial. More than a few of my friends have squandered inheritances leaving them back where they started pretty quickly, and usually bewildered. Many people deny their need to save money.
Instead of the reverse, money can own you, either with today’s fear or tomorrow’s reality shock. Even if you make enough to cover your bills, money may be slipping away from you, and if you are struggling to make ends meet, there is no denying you need to get control. Get your gloves on. We’re going to throw some rope.
Money is Energy
Unless you own an atom splitter, money is the most compact form of energy you can harness, but it’s passive on its own, free of volition like a tumbleweed. With a small amount of knowledge you can transform money into almost anything. You can focus it like a laser or spray it like confetti. You can grow it like a beanstalk. You can play it like a cello. You do that by learning the numbers. You rope, throw, and brand ’em. You herd ’em into corrals. There aren’t that many numbers you need to wrangle, and one in particular is the mother of them all, the locus of your decisions.
Your Monthly Nut
In the Simple System for Everything I propose you only need to pay attention to these scales: What you want with your life, the next year, this week, today, and now. But the rest of society requires we deal with our money in terms of monthly payments to credit cards, phone bills, mortgage or rent, and razor blade delivery.
To start to master money, you need to know the One Number, your monthly nut. And here is the rub.
The total you pay in monthly payments is not your monthly nut.
Your monthly nut is what you pay every year to live a comfortable life—
divided by 12.
Knowing your monthly nut is the beginning to your grip on money. What follows is a simple approach to using your monthly nut as the key to unlocking control of money.
The sickness of fluctuation denial
and the cure.
Last week I recalculated my monthly nut and I freaked out. For about 4 months I was ignoring my rising insurance and business expenses, my extra traveling, and my dwindling savings. (No wonder most people stay in denial!)
I definitely lost some sleep, but now that I know my monthly nut, my plans will adapt. I’ve always been okay, basically able to recover from down months, and down years. I’ll be okay again. It’s probably true for you, too, if you are in fact making it from year to year. If not, then it’s best to address your problems now and not when the hole is too deep to climb out.
Don’t be a Scaredy-cat. Don’t be a Denier. Not when it comes to money.
Calculating your monthly nut is not trivial; you have to actually add up everything you spend in a year— everything. The big problem is that almost every monthly calculator only deals with monthly expenses. Once you add up rent, food, utilities, car payments, gas, and a few fun activities you do every month, your nut can look quite reasonable. This is where denial kicks in. You tell yourself, “Oh, I can handle this,” and you ignore that other faint lurking voice that whispers, “That’s not everything, buster.”
That faint lurking voice is right. There are many other expenses that occur throughout the year which make your monthly output fluctuate. Let’s coin the term “fluctuants” because it sounds like flatulence and it makes me giggle to say it. Fluctuants make your monthly expenses vary, sometimes drastically.
Fluctuants can drive you crazy. You may think because you didn’t spend very much this month you can go buy a pair of Ferragamo peep-toe booties. And just when you think you’re getting ahead, you get smacked down with a biannual car insurance premium, a plane ticket to see Aunt Betty, and a broken water heater.
The categories monthly calculators leave out can be quite significant. When you calculate your monthly nut you need to sum up everything you spend every year that isn’t a regular monthly. Consider these fluctuants:
- Annual dues and premiums
- Big gifts
- College savings
- Computer equipment and software
- Contributions to causes
- Clothing (I don’t buy clothes every month)
- Continuing education
- Computer equipment and software
- Doctors, dentists, and other medical expenses
- New telephone
- Projects (home improvement, art, school)
- Retirement investments
- Special holidays
- Summer camps
- Zoo animal rescue missions
Your monthly nut includes these expenses. (To give you some perspective, fluctuants add up to 40% of my monthly nut.) Total them up for a whole year and divide by 12 to find your fluctuant average. Add it to your regular monthly expenses and you have the One Number you need to start your money mastery.
NOTE: Your credit card bills are a collection of expenses. Separate the regular monthlies from the fluctuants. This is key. See below.
The Cure: Automatic Transfers into the Set Aside Account
Financial counselor Susan Bross taught me and my wife (at the time) a system for dealing with our monthly budget, and after we learned how to use it, we never worried about money.† That was a monumental accomplishment and the solution was so simple. It’s called a Set Aside Account. Here’s how it works.
First, instead of one checking account for all your money, use at least one dedicated savings account called the Set Aside account. This account saves you the anxiety produced by fluctuants. Once you calculate the monthly average of annual fluctuants, set up an automatic transfer of that amount into your Set Aside account. That way your Set Aside account is always being filled up. Then once a month look at your expenses and transfer back into your checking account only the amount and all of the amount you spent on fluctuants. It’s that simple.
There’s a fair amount of work to do here, but the payoff is so spectacular, it feels like magic.
- You quit stressing about credit card bills.
- Your savings grow faster than you expect.
- You quit fighting with your partner (about money).
- You have more options in lean times.
- You choose better options in fat times.
Here are some of the ways this happens.
When a credit card bill comes, calculate the fluctuant total and pay it by transferring it from your set aside account. Because you’ve budgeted these expenses ahead of time, and you’ve paid into your account steadily for months, the money is there! No worries.
REALITY CHECK: It was after about a year of doing this that I realized credit card bills didn’t phase me any more.
One way to grow your savings is to divide the set aside account into separate accounts. If you know you’ll need a new car in a few years, that is definitely something for a separate Set Aside account.
Now here’s a biggie. Everything above your monthly nut goes into separate savings accounts. Start with a project or a trip you want to save toward. (I want to go to Istanbul.) Automatically set aside 10% of what you need every month into that account and soon enough it will be there. I swear, maybe because I’m a Scaredy-cat and tend to over-budget, the money grows faster than I ever expect.
Finally, I have to thank Susan Bross and plug her services again. If you need help understanding this system, or even more importantly, separating the emotional baggage you carry that weighs down your financial decisions, talk to Susan.
† Never worry about money? Almost never. In the last four months I dropped the system and my worry came back big. I put it back in place last week, and the worry is almost gone.