As you progress through the life of executing a financial plan, from time to time, you will notice some trends forming; some trends will be good and others will be bad. While most of the trends happening with my money these days are good, there was a time not too long ago that I noticed a particularly disturbing trend that usually appeared in my emergency fund.
In a word, this trend could be summed up as “complacency,” but had its roots in some leftover bad money habits.
Most financial media will focus more on something called “Sudden Wealth Syndrome,” where those who have suddenly come into large sums of money either spend their windfall wildly until they’re broke (or worse), or they will hoard the money and become very mistrusting of just about anyone.
I consider the topic of this post to be Sudden Wealth Syndrome’s slower cousin, but the effects are the same. Only I ended up alternating free spending, because I have a little more money than I’m used to, with hoarding money to catch up from my previous spending spree.
Here’s What Happened…
If you follow this blog even a little, you know that I like numbers a little too much for my own good. This means that I am always paying attention to what those numbers are in my various types of accounts.
The by-product of this level of attention to detail is something I alluded to in my last post; milestones in an account’s balance can get turned into accomplished goals very easily. And, goals achieved should be celebrated, right?
The problem came when I would use my emergency fund money to celebrate the milestones I had passed in that emergency fund. You may have deduced that this practice has tendency to undo the achievement being celebrated. Much like those who acquire sudden wealth through a windfall struggle with means well above what they’re used to, the slow build that good money habits give you will occasionally allow you to surpass the level of a previous you. However you come by it, leveling up your finances can be a struggle.
I had struggled with bad money habits long enough that I was happy with, or maybe just used to, an emergency fund balance in the $1500-2000 range. Exceeding a balance of $2000 would lead to a mild celebration to drop me back into a lower range, and I would repeat each cycle a couple times; yes, I actually celebrated the same “goal” multiple times. The pattern would repeat at $2500, $3000, and $4000.
What this behavior caused was a series of self-imposed plateaus on my financial progress. Basically, my emergency fund balances looked like this over time:
Everyone goes through periods where we encounter plateaus in whatever goal we may be pursuing: strength and endurance training, fat loss and muscle building, our golf game perhaps, and our money. What’s important to note in the chart above are the red lines that I’ve drawn to represent plateaus caused by my own bad spending habits. I was fortunate that I didn’t encounter a real financial emergency during these times.
So, how do fix the bad habit?
Escaping the Cycle?
In an attempt to move past spending out of my emergency fund for some frivolous expenses that, well, aren’t emergencies, I decided to open a separate savings account for more discretionary endeavors. I’d like to tell you it worked out splendidly, but I just don’t have the track record established to know for sure. Not to mention, that financial plans are always changing.
For this new discretionary account setup, I repurposed a savings account I had originally dedicated only to travel expenses. In this respect, the COVID-19 pandemic actually gave me a silver lining. That silver lining being that there isn’t much traveling to do in 2020.
I moved my discretionary account from Marcus to Ally, so I could take advantage of Ally’s sub-account feature that they call “buckets” and continued to deposit 2% of my take-home pay directly from each pay check. (FYI: 2% of take-home pay is my starting point for any new account that I open; I hope to eventually reach 5% of take-home in this account.)
Once my account was open and funded, I set up buckets for travel, electronics, entertainment, gifts, clothes, home, and hobbies. Some of those buckets might be considered a “go crazy” bucket that would allow me to spend some beyond the monthly budget money on little old me. There’s even the required “core savings” bucket that I could use as an “anything within reason” category.
Hopefully, giving these dollar amounts a name will keep me from seeing a nice, juicy account balance in my emergency fund and tell myself “you can handle this.” And, if I want a new television or gaming system, and there’s not enough money in the “electronics” bucket, but enough in the account as a whole, I will need to stop and think for a bit before moving money from bucket to bucket just to afford the new shiny thing. (I’ll have to ask myself “Do I really need to do this NOW?”)
Time will tell how well my new plan features will work out, and I’ll need to navigate the return of my old spending temptations when we get to the other side of the COVID-19 pandemic; the changes have worked well in the current environment, though. And, I think that by giving more of my money a specific job with a name backing up that job up can only help. If the changes turn out to not be enough, I’ll go back to my plan and make some more adjustments.
As time goes by, everyone will discover some holes in their financial plan, whether a result of a flaw in our behavior or a change in the world around us and how we feel about it. The changes I covered in this post aren’t particularly elaborate; they’re just a small improvement that I hope will lead to bigger things.
Until next time…
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