Written by Trent Hamm, The Simple Dollar is a popular personal finance blog that chronicles one man's road back from overwhelming debt to financial security. Hamm declared the contents of the blog to be in the Public Domain in 2008 and available for sharing when attributed properly. We will share a couple of posts a week.
There have been at least two periods in my life where I lived in an extremely cheap fashion.
The first was during a period in college in which I lived in off-campus apartments with roommates. I lived off of ramen noodles and whatever was on sale at the grocery store (I lived on lots of eggs) and whatever was being given away at campus meetings. During one period, I shared a tiny two bedroom apartment with six other people for several weeks (that number changed over time, varying from three residents to seven over the course of a year). I read piles of library books and spend an absurd amount of time working (I was holding down two twenty hour a week jobs while also being a full-time student).
The second – and perhaps more important – period occurred when I first reached financial meltdown. For most of a year, I went as stoic as I reasonably could while working in an office environment and having a baby at home. I went back to eating exclusively at home. I sold off the vast majority of my entertainment items. I used the library almost constantly. I tried to tie down every single penny that I could.
It didn’t really work.
Over the course of several months, I came to really resent “heroic budgeting.” I found myself constantly being tempted to spend money again, especially as the progress didn’t happen as fast as I wanted. During the fall of 2006, I felt really frustrated that I wasn’t able to spend any money, yet my financial situation wasn’t really getting any better, either.
I splurged several times during that timeframe, buying unnecessary things that set back my financial progress. In fact, if I hadn’t started writing The Simple Dollar during that period and spelling out in detail all of the things that worked well (giving me a chance to deeply reflect on all of my choices), I might have given up on the whole thing.
Within a year, I wasn’t trying to use a “heroic budget” at all. I had given up on the idea and moved to a much more relaxed budget, one that still caused me to save money and focus on debt repayment but didn’t push me nearly as hard.
Why did “heroic budgeting” fail?
For starters, it was actually successful at first during that “honeymoon” period.When you first start your financial recovery, the entire process is exciting and energizing. You begin to really feel in control of your money for the first time and it’s exhilarating. All of these things are new and you’re seeing how they’re positively impacting your finances. You’re probably also doing things that are having a big one-time impact, like selling off most of your DVD collection or getting rid of a bunch of collectibles.
The problem is that when the “honeymoon” period wears off, the excitement isn’t there.
I talked about this recently in an article entitled The Emotional Cycle of Change. In that article, I outlined a well-known psychological theory that states that we mentally move through five stages whenever we commit to changes in our life:
Stage 1: Uninformed optimism.
Stage 2: Informed pessimism.
Stage 3: Hopeful realism.
Stage 4: Informed optimism.
Stage 5: Completion.
The “honeymoon” period is stage one – uninformed optimism. Everything looks great because everything is new. You’re seeing the positive impact of everything without really seeing much of the negative.
The next stage, the one where the “new” excitement wears off, is stage two – informed pessimism. That’s when you start to see the negatives in clear view for the first time and the negatives are the clear new thing. Things that seemed like such a great idea a few months ago now seem painful because you’re now aware of all of the drawbacks.
With me, as with a lot of people, informed pessimism hit my financial recovery hard. To put it simply, I felt a complete lack of freedom due to the “heroic budgeting” I had adopted during my recovery period. I felt like I was giving up huge parts of what I loved in my life and I missed those things badly.
This leads to the second problem. When you heroically budget, you cut out almost every enjoyable expense. For most people, that means cutting out an awful lot of the pleasures that have filled their life in the recent past, and that’s a very rough change. It affects almost every element of your life, and if you’re not adept at finding substitutes, it becomes very hard.
I was able to find some substitutes that were enjoyable. I very much enjoyed moving to actively using the library and engaging in more reading instead of collecting books, something I’m still enjoying today (right now, I have seven items checked out from the library, in fact). I’ve fallen in love with preparing food at home in my own kitchen.
Many substitutes weren’t enjoyable, though, and some items had no substitute. I sorely missed stopping at the coffee shop. I really, really missed having the latest gadgets and being able to talk about the newest video games with other gaming friends. I somewhat missed golfing and going out for drinks after work most nights.
I didn’t really have great substitutes for those things and those experiences. They existed, of course, and I gradually found them over time, but it simply isn’t easy to replace most of your normal daily life patterns in a short period of time.
That’s the third problem – heroic budgeting forces you to upend almost every routine in your life simultaneously. It requires that you upend your routines in almost every category of your life, from entertainment to food consumption, from hobby spending to household supplies.
It’s okay to uproot a routine or two at a time because you then have the other routines to fall back on to find a sense of normalcy. Heroic budgeting uproots many different routines all at once.
Finally, heroic budgeting allows for no flexibility at all. Often, when people subscribe to heroic budgeting, they’re in a situation like I was. They find themselves facing a financial meltdown, so they commit to a drastic change in their behavior and, at first, they find that it’s all fun and games.
Of course, that’s not only followed by a shift into informed pessimism and, not too long after that, an emergency occurs that kicks your new budget in the face. Your car breaks down or you have to take an emergency flight to Atlanta to see your sister or you lose your job.
Those two forces work together to blow apart your heroic budget. Not only are you somewhat resenting your budget, you’re now seeing that it doesn’t work when you need it most.
There’s a much better solution to all of this than heroic budgeting. Rather than simply forcing myself into that kind of tight budget, I wish I had taken a different three step approach during my honeymoon phase of personal finance recovery.
First, build a nice emergency fund. It’s a lot harder to blow your budget to pieces if you have an emergency fund to handle those big unexpected catastrophes. Your very first financial move should be to build an emergency fund consisting of at least $1,000 in a savings account somewhere. If you ever find yourself slipping below that threshold, pump it back up to at least $1,000. If you don’t have any high interest debts, move that emergency fund up to a few months of living expenses.
Second, build a real budget. This means recording all of your expenses for a month or so and building your budget on the back of those real expenses. You Need a Budgetor Mint both work well for this task. Just write down everything you spend over the course of a month or two and use that material to come up with a budget. In truth, a budget mostly serves as a good tool for figuring out how much you can afford to save (or put toward extra debt payments) each month.
Finally, give yourself some breathing room for pleasure. You shouldn’t write down a big fat zero in the categories of “extra food” or “entertainment” or “hobbies.” It won’t work. You’ll resent it. Put a reasonable, small number in there instead.
Along the way, try substitutes for your more expensive hobbies and pleasures, but don’t give everything up all at once. Again, not only will you resent it, it will make it very easy to just blow your budget to smithereens and completely give up on financial progress.
Heroic budgeting is doomed to fail for most people. Don’t commit yourself to a Herculean budget. Instead, commit yourself to a path that’s sustainable and that leaves you feeling happy both in terms of your daily freedoms and your long term goals.