Please welcome my husband, Phil, to Cents, Sense & Sensibility. I have asked him to write for CSS since he is the other half of my financial life and can bring a different perspective to the blog. You can expect him to make a regular in my Wednesday slot. This isn’t his first appearance though, check out ‘What Grand Theft Auto taught me about me about my finances‘.
Far too often, my wife and I look over our finances and think that if only we made a little bit more each month, we would be set; a mindset common to a lot of people. Regrettably, science is not on your side with this thought, and in actuality, that extra money could actually make things far worse.
I’m not talking about the studies that show that lottery winners and others who come into large sums of money quickly are routinely in an even worse situation within 5 years.
Let’s Talk About Buckets
Instead, I want to talk about buckets.
Let’s say that your finances are a bucket, and your money is the water in it. In this analogy, you remove water from the bucket to pay bills, debts, etc. If you’re not looking after your finances, then you’re not looking after the bucket, and there will be holes in it where the water, your money, is seeping out.
Increasing the amount of money you bring in does not repair the bucket, it only increases the size of the bucket.
Now, you may then think, well, if the hole is the same, then wouldn’t the larger amount of money compensate for that leak?
The equation for the flow rate of liquid out of a hole in a bucket is:
V/t is the flow rate of liquid through the hole in volume/time,
A is the area of the hole, which shall remain constant,
g is the gravitational constant, and
H is the depth of the hole below the surface of the water.
This equation shows that increasing the amount of water in the bucket does not help. Putting more water in the bucket will only increase the depth of water, money, in it. If you do not repair the hole in your bucket, then you will lose money through that hole even faster.
Buckets Equals Budgets
Analogously, if you do not review your finances and identify and isolate areas that are ‘leaks’, then making more money will only result in those leaks being more substantial.
For example, let’s say that I stop by a coffee shop in the morning and buy a coffee. It’s a coffee, who cares. But actually, that coffee is $3 a day, $15 a week, or $750 a year. If I start to make more money, I may well justify to myself that I should maybe get a donut with it. Why not? I’m making more now. That donut now becomes an extra $250 a year, making my total leak an even $1,000.
Am I suggesting not buying coffee ever again? No.* If you really do like your coffee in a morning, then by all means buy it. I only ask that you be aware of how much you are spending, and what you are spending it on.
Regular tracking and reviewing of your spending will identify ‘leaks’. And a leak that has been identified and approved is no longer a leak. Use an online tracking program like Mint to help you stop up your own leaks.
*Well, sort of. We all know that coffee is actually disgusting, that’s why we all add things to it that mask its taste. So the fact that you don’t like coffee is one reason to give it up, but it’s not a financial reason.
Courtesy of Free Images/Ann Kristin Edvartsen