Thursday, January 17, 2008

Another look at the treadmill

Back in August, I wrote about my frustration with the paycheque-to-paycheque treadmill, and the feeling that, despite my efforts, I still seemed to be struggling. My question at the time was whether you ever actually step off the treadmill, or simply get used to the effort it takes to stay on.

Since that post, my situation has improved quite a bit. My Freedom Account is doing its job by covering irregular (non-emergency) expenses as they come up. My Emergency Fund can comfortably handle any emergency under $1,000, my debts are shrinking, and I'm generally sticking to my budget.

And guess what: it is starting to feel easier.

Oh, I still worry about coming in under budget, and sometimes the last few days before payday can feel like an eternity, but I definitely feel less pressure now than I did last summer. A few things have contributed to this:
  • I've converted my budget from monthly to bi-weekly, to be in sync with my paycheques. This means that, every time I get paid, the same amount gets paid toward bills, shunted to savings, and left in chequing as spending money. The days of "OK, this is the first pay of the month, so I have to send $400 to my Freedom Account" are over, and the volatility is gone.

  • I've "promoted" more of my regular expenses into my Freedom Account. This means I don't need to remember not to spend that $45 that's sitting in chequing, because it's earmarked for widgets.

  • I've improved the tracking of my Freedom Account balances (inspired by Trent and Michael). This has stopped me from over-using these savings, and gives me a clearer picture of what I can actually afford. Without knowing what your budget is, you can't possibly stick to it. If I want something for which I haven't yet saved enough, I wait. If I need something for which I haven't yet saved enough, I look to the Emergency Fund.

  • Speaking of the Emergency Fund, I've surpassed the magical $1,000 threshold, so my "bare minimum" cushion is in place. That helps a lot with the mindset.
Personal finance is an interesting topic, because it really requires you to walk a fine line. Automation is always encouraged, in order to take emotion and discipline out of the equation, but it's also important to stay engaged enough that you don't become complacent. You should always know what's going on, and look for areas for improvement, but you also want to put things on auto-pilot. That can be a tricky balance to strike.

In the interest of stretching myself out of complacency, I have a few tweaks that I want to make to my finances:
  • Create a chequing "cushion". This will complement my Emergency Fund, and essentially give me a buffer to cover any temporary expenses that may come up. An example is a health expense where I am expecting a reimbursement. Basically, this would be my first line of defense for "out-of-budget" expenses. I have to work out how big this cushion needs to be, and train myself to know I'm effectively "broke" when the cushion is all that's left in the account.

  • Start snowflaking. One idea I've been toying with is to round up my purchases to the next dollar, and snowflake this extra to debt. I'd like to try this for a month, and see what the result looks like.

  • Work with Ms. Loonie to develop a household budget. I currently track only my own spending. Although Ms. Loonie is very responsible with her money, I think I need to stop thinking of our budgets separately. I've already talked about improving our financial communication, so let's put my money where my mouth is.
Let's see if we can get this treadmill to slow down even more.

2 comments:

Mrs. Micah said...

I like the of a biweekly budget, it makes so much sense! Currently I'm not sure if that'd be best for us, but maybe in a while--depending on our jobs and pay dates.

Congrats on slowing down the treadmill!

Brian said...

Wow, you're ahead of me on the emergency fund but it's amazing that your thoughts parallel mine so much.

I'm planning on keeping a $1000 cushion in the new PCF chequing account and I've started funding my Freedom Account after getting the idea from your earlier posts. I use an spreadsheet as well to track the cash flow in and out of the account.

Funding of the Emergency Fund starts with this weeks paycheques and I'll be keeping it in the same savings account as the Freedom Account.

All of my wife's and my accounts are joint however, it's been that way for fourteen years.

I agree with you that biweekly budgeting is the way to go. The simplicity of auto transferring the same amount each pay is the winner for me.

Currently, we withdraw cash for our weekly groceries and spending money. Anything left over at the end of the week goes into the savings jar to be snowflaked into the debts.

Having my wife excited and onboard with my plans is key for getting out of debt and buying a house.

I'm looking forward to the security of having the Emergency Fund funded. Your success is an encouragement that we can make it too!