Measuring for Change
By Kevin Gibbons
Monitoring spending is key to successfully changing your financial situation. However, it can be challenging to encourage clients to monitor and control their spending within the parameters of the financial plan you have established together. Even with the best of intentions, some people find that task overwhelming.
Four years ago, I replaced my trusty 2004 Saturn (with almost 300,000 miles) with a 2014 Mustang. After almost four years of ownership, my favorite feature on this car is still the Real Time Gas Mileage display.
The Mustang has this nice graphical display showing your average Miles per Gallon and your instantaneous MPG. Drive conservatively, and you can see your average mileage slowly increase to a respectable 30 mpg. Tromp on the accelerator and watch your instantaneous mileage drop to below 10 mpg and then see how long it takes to recover.
I find myself watching that indicator and feathering my foot on the gas pedal, to maintain my desired speed, while getting the best possible mileage. The instant feedback the display gives me has a strong impact on my driving habits.
What does this have to do with Savvy Living? As the title suggests, you have to measure to improve. Just like I modify my driving behavior based on the MPG feedback from my car, you can modify your spending and saving behavior based on the feedback from your financial information, like your bank account balance or personal financial tracking software.
A critical aspect of this process is the time of the feedback loop. Since I started driving, I dutifully calculated and tracked my mileage every time I filled up my gas tank (miles driven since last fill-up, divided by gallons of gas to fill tank gives miles-per-gallon). Tracking this information gave me some indication about the health of my car.
However, getting one datapoint every fill-up didn’t help me adjust my driving style very much (I already knew to drive smoothly, not to accelerate and decelerate excessively…). But, in my Mustang, with instant feedback, I could see immediately how my actions affected the car’s mileage.
Similarly, checking your bank account balance or spreadsheet once per month will let you know if you did well, or missed your goals, but will do little for helping you change your behavior. Tracking your spending on a daily basis is the key to improving your spending and saving habits. If you know where you stand financially right at this minute, you can make an informed decision on how to make that next purchase.
So, upgrade your financial tracking methods to monitor your spending and saving on a daily basis and pay attention to how your purchases immediately affect your target spending goals. Use that feedback to change your spending habits in real-time. But don’t over-obsess about it. The goal is to modify your behavior to meet your goals, and to ensure you make informed decisions. Every once in a while, I downshift, spin up the turbos and cut loose in my new car (that’s one of the reasons I bought it). I just make sure I understand the effect of doing that, and can “afford” it in the mileage targets I am aiming for.
Just like I can’t spend all my driving time looking at that MPG readout without running the real risk of crashing my car, you need to use this as a tool, not a dictator.
Kevin Gibbons is a Cash Flow Planning Expert, the Vice President of The Savvy Life and co-author of the international bestseller Living The Savvy Life. For the past eight years, Kevin and Savvy Life Founder Melissa Tosetti have worked with over 625 individuals and families to create Spending Plans.
To learn about how Kevin and Melissa work with clients to create Spending Plans, visit The Savvy Life’s Home Page. If you’d like to learn about how they work with financial advisors and their clients visit: The Savvy Life Advisor’s Page
