Managing Money 101 - Part 1
You are falling.
The wind is whipping you about and it takes effort to keep yourself from spinning out of control. But you do it.
Now you are enjoying the descent - gazing in wonder at the world, at the horizon all about you. The fear, the panic, the nerves, all hammering at your guts, are still there. But they are now being drowned out by the thrill of the dive.
The feeling of dropping so fast makes you grateful you have something to slow all this down. Something to protect you from making this the final risk.
When the time is right, at the moment you were trained to do it, you pull the cord. The pilot chute pops out, quickly pulling the main canopy behind it, and the enormous sheet opens up above you.
As you drift lazily the rest of the way, guiding yourself toward your target, it dawns on you: this isn’t just you taking a risk, this is you being alive.
The financial world may not be as thrilling as skydiving, but it can help us think about things in a different light, and maybe it will help you start your journey toward managing your money in a way that makes you feel alive.
In this article we’re going to look at some financial components by comparing them to the parachute.
The Main Canopy
Budgets don’t go skydiving. But in our scenario, nothing else you do will be as effective without one.
A budget at its best will fit your personality, since it will take will power to manage it properly. There's no one simple and easy hack to creating a monthly budget. But there are also some great examples of what it can look like.
Let’s dive back into our metaphor to help us think about what a budget can do.
There are typically 2 strength measurements that matter for a parachute canopy: tensile strength and tear strength. You can really nerd out on the math with canopy fabric if you want, but let’s keep it simple. Compare it to financial terms this way:
tensile strength = income
tear strength = income - expenses.
How much income do you currently have? That’s the tensile strength of your budget.
How many expenses do you currently have in comparison to your income? That’s the tear strength of your budget.
How much force can your canopy (budget) handle on both of those measures?
If an enormous force is being imposed upon your budget, the ratio of income to expenses needs to change. If you are dealing with a lot of financial pressure (job loss, health difficulties, loss of a loved one, divorce, etc.), you will need more coming in than going out.
Keep in mind, that ratio can change in two directions: (1) increase your income, or (2) reduce your expenses.
Before you go looking for a new job or additional income, start with what you have. Nothing wrong with job hunting or firing up a side hustle. But it shouldn't be your first option. It could be an unnecessary stressor in an already stressful time of your life. Besides, most people discover they have better tear strength than they realized.
If you don’t know your financial tear strength, it’s time to change that.
Here's a very simple way to start your first budget (or re-think your current one!):
- Make a list of your income (what you expect to see this month)
- Make a list of your expenses (what you expect to spend)
- Subtract the expenses from the income
It really can be that simple. No app required. Just a sheet of paper or a digital document.
If you’re in the red:
If you end up with a big fat minus sign in front of that number, don't cry. I mean, it’s probably just some dust in your eye, so no worries. If you’re not shocked by this new revelation of being broke, maybe you can start seeing your brokeness in a new light. You have the data before you, and you can start taking action.
If you’re in the black:
If you end up with a positive number, congratulations. You have enough money to cover your expenses, but don't get all spendy just yet.
As a financial skydiver, you have the benefit of seeing the entire world laid before you. If you think about it, we only have so many years to generate active income. At some point, what we earn during our income-generating years will reach zero. To slow your descent to zero, or to have a ton leftover to pass on, you need a good parachute canopy. But there’s more gear that goes along with it, and it can be just as important.
In my next article, we’ll look at spending control and some money-saving tips.
