you need a budget

Sick of being told you need a budget? I've got another way for you try to manage your money without breaking out excel.

Many of you know that I used to work as an environmental investigator for the state. One of the most important parts of the onsite investigations I conducted took place in the control room of the regulated entity. It is in this room that most of the equipment—flares, thermal oxidizers, reactors, etc.—is monitored and operated. No matter what type of equipment each facility had, I would ask some of the same questions to the operators, with perhaps the most important ones being: what are the optimal operating parameters for each piece of equipment, and how do you know when something has gone wrong?

You see, all of those monitors, thousands of color-coded buttons, and knowledgeable people working around the clock meant nothing if they couldn’t identify a problem. And furthermore, if they couldn’t identify something before it became a problem.

Operating Parameters and Alarm Settings

The operators in the control room typically knew their optimal operating parameters for each piece of equipment, such as temperature ranges or feed rates. They also knew to set their alarm system to alert them well before one of those operating parameter limits was breached. When an alarm rings, the operator can begin to trouble shoot and hopefully come up with a solution before damage is done. This simple act of setting alarms at the right parameters is what keeps horrific environmental catastrophes like BP’s 2005 Texas City Refinery Explosion a rare event when taking into consideration all of the plants in daily operation across the United States.

Built-in Financial Alarm System

So what does this have to do with finances? It occurred to me the other day while shopping at a nearby home improvement store that I have a built-in financial alarm system that serves me well. I know the parameters of our household finances—such as salary, bills to be paid, large purchases for the month, spending budgets—and my system is set to alarm at very low price thresholds. It fluctuates depending on what I am looking to purchase, say $20 for a piece of clothing, a few dollars for non-durable consumer goods, or $2,000 for a vehicle (I have always driven a beater car).

You might be looking at my alarm thresholds and wonder how I can survive in our modern society. I assure you that my husband and I live quite comfortably and rarely do without. If the alarm goes off, then I think of other ways to obtain what I want, such as playing the Drugstore Game or by making something myself. Having this internal sensor is especially important for the set-it-and-forget-it financial mindset we have in our household. Since we have automatic withdrawals into our retirement account each month and we don’t like to whittle away our time reviewing/readjusting our budget every two weeks, we must stay within the agreed upon maximum price thresholds. Not heeding these internal financial alarms might cause a financial catastrophe in our household, such as over withdrawing our checking account or going back into debt.

Recalibrate Your Internal Financial Sensor

If you don’t have your own internal financial sensors, or if they are set too high, take the time to recalibrate in accordance with your budget. For example, if you allocate $300 a month for food, then you should spend roughly $75 per week. So if the second week of the month rolls around and you have already spent $200 at the grocery store, you will need to slow things down. And don’t forget, the alarm is just to warn you to make some changes before a problem occurs. Don’t be discouraged with a few breaches; rather take it as an opportunity to check your spending and ensure that you will meet your numbers for the month.

Don’t have your own internal financial sensors or they're set too high? Take time to recalibrate in accordance with your budget. Click To Tweet

One or two purchases that set off my internal sensors are not going to cause a financial disaster. But a cascade effect could be set into motion that will (it has been found that one innocent purchase can open up the shopping floodgates). The cascade effect is typically what happens at a plant that experienced an environmental catastrophe. One parameter is breached, causing the parameter on the next piece of equipment down the line to be breached, causing a partial shutdown, which in turn causes a whole bunch of problems. You can always pinpoint the root cause of the entire disaster after the fact, and though it often starts with one valve or one wily piece of equipment, it almost always ends with a lot of headaches, an overhaul of part of the system, lots of reports, and retraining.

This is why it is important to set meaningful alarm systems so that problems can be avoided instead of dealt with.

What are your internal financial sensors set at?

2 replies
  1. S. B.
    S. B. says:

    I remember reading about the Three Mile Island nuclear incident. So many different things went wrong – some human errors, some eletrical/mechanical errors, some unforeseen design issues. These errors all had backup systems, most of which worked properly. However, whether they worked or not, they also created additional complex behavior in the system, leading to further cascading issues, most (but not all) of which were contained by other mechanisms.

    I never thought of things this way, but yes, a person’s finances are a complex system as well. We often have many loss mitigation mechanisms in place, but will we detect the problems early? Will the “sensors” trigger correctly? Will the “backup systems” engage but create additional unforeseen problems? It’s definitely something to think about!


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