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Too Small to Fail

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Photo: RLEVANS

You’ve heard of Too Big to Fail, right? Well, this week I want to introduce you to a simple personal budgeting tactic I call Too Small to Fail. Around my house, this dumb little idea helps my family keep our savings on track and, if you want to be hyperbolic about it, prevent financial collapse. (See, it’s the opposite of Too Big to Fail in more ways than one.) Before I explain how it works, let’s look at what’s wrong with a traditional budget.

Budgets ask you to look into the future. People are not good at looking into the future. Just watch a World of Tomorrow filmstrip. Where are my helpful robots? (Zhu Zhu hamsters are not helpful!)

Predictions about money are even less accurate. How much am I going to spend on dining over the next month? Beats the heck out of me. Will we be invited out to dinner? How much money is left after buying groceries? Trying to sit down and write a line item each for groceries, dining, entertainment, and so on is silly. You’ll get the numbers wrong and then feel guilty about it later.

Some people renegotiate their budget over the course of the month. “Okay, we overspent on dining already, so we’ll take some money out of entertainment and skip the movies.” If it’s so negotiable, why write it down in the first place?

I remember my parents making this kind of budget when I was a kid. Once a month, they’d sit at the dining room table and argue. You could see the DON’T COME IN HERE waves from several rooms away. When I grew up and got married, my wife and I adopted the same system, because we didn’t know any better.

Well, not anymore. Too Small to Fail relies on two insights:

1. Budgets make you worry most about small expenses, because those are the negotiable ones. As Michael Rubin put it in a MintLife article last August, budgeting can lead to “relentless focus on minor expenses.” So in our budget, we throw all the small-ticket items into the same category: groceries, dining, entertainment, it’s all the same. If we spend more on dining one week, we spend less on groceries. The total amount in the bucket is important, but the amount spent on each little category isn’t.

To illustrate, our monthly budget (with made-up numbers) looks something like this:

Rent:$100
Phone:$50
Retirement:$25
Vacation fund:$12
Small-ticket items:$30

The numbers are all basically the same from month to month, and as long as it all adds up to less than our monthly income, we’re good.

2. You don’t have to let your boss decide how often you get paid. Have you ever had a job where you were paid monthly? My wife gets a monthly paycheck. I don’t know about you, but I am incapable of making any sum of money last a whole month. Remember Brewster’s Millions? I could have blown the $30 mil in two weeks.

Instead, why not pay yourself weekly? That’s how we do it. We pay ourselves a lump sum every Friday to be used for our daily expenses. (Monthly, nonnegotiable items like rent and utilities come out of a separate account.) Because the money only has to last a week, it’s hard for us to get into much trouble. Sure enough, every week, we spend most of our allowance in the first three days. But then there are only four days left. If we run out of cash on Wednesday and have to raid the pasta drawer for a couple of days, big deal.

I know, this sounds anal and artificial. It is. It’s also effective. Ramit Sethi, author of I Will Teach You to Be Rich, advises you to use barriers to prevent yourself from spending. The classic example is freezing your credit card in a block of ice. This is the same idea: I’m not really out of money when the weekly allowance is spent. But to get more money, I’d have to dip into another account. That’s enough of a barrier to make me slap my own hand and say, “Don’t do that.”

You could even pay yourself twice a week. Or you could use this system to give a separate allowance to yourself and your partner.

If you want to give this a try, start right after you deposit your next paycheck. How much should you pay yourself? It’ll probably take several weeks to figure it out. You’re not trying to put yourself on an austerity program—though if you’re in need of an austerity program, this is a good way to implement it. You want an amount that will cover all of your expenses for the week, but not so much that you’re outspending your income or failing to leave yourself enough to pay your monthly bills.

What about big-ticket items like a new computer or holiday gifts? We save for those, a few dollars a week, over the course of the year.

Too Small to Fail lets you have fun by spending all your money every week. Only you and your helpful robot have to know that you’re being fiscally responsible at the same time.

Matthew Amster-Burton, author of the book Hungry Monkey, writes on food and finance from his home in Seattle.