I like Stephen R. Covey’s work. I own a copy of The 7 Habits of Highly Effective People and find that it has some great advice for managing your time, goals, and priorities. Covey expanded on the time management principles in FIRST THINGS FIRST, a book he wrote on time management.
There is a nice anecdote he gives in the book about a professor who quizzed his students by producing a jar and some stones, asking them how many stones they thought he could fit in the jar. Once the guesses were made, he added the large stones to the jar and asked the students if the jar was full, to which they answered that yes, it was.
The professor then pulled out a bucket of gravel and filled the jar with it, shaking the jar to force the gravel into the spaces between the rocks. He then followed this with a bucket of sand, each time asking if the jar was full. Finally the professor poured water into the jar until it was completely full.
At the end the professor asked ‘So what is the point?’ to which one student replied that there are always gaps and if you work at it you can always fit more into your life. The professor’s reply was that the real point is that if you do not put the big rocks in first, you will never make them fit. The jar would be too full of gravel and sand and water.
I like to think that I manage my finances in much the same way: to me, the big rocks are about paying yourself: you first take 10% and put it toward the future, saving it in an RRSP or 401k or whatever is provided for you. Next comes the emergency fund: 10% put away to give you a safety net for the future. When the net is built you can always put the 10% toward a vacation fund or big screen TV fund.
The gravel is about paying others: your debt payments, rent, utilities. All those nice pieces of paper that come in the mail with numbers that are preceded by dollar signs.
The sand is essentials: food, fuel, things you need on a monthly basis.
The water is yours: whatever is left after you pay yourself, pay others, and buy essentials is yours to spend any way you like. Some may have more of this kind of money than others, but that is why it is good to be economical and frugal: getting a good deal on A means you have cash to buy B.
I keep a spreadsheet that lists how much I bring in, then the money that I pay to myself, and then all the monthly payments that I make to others. Finally it has an estimate of some of the consistent monthly essentials, but I do not plan out the remainder (I have no planning for dining out, entertainment, etc).
I find that it works well for me: I hated having budget amounts on things like dining out and entertainment, because I would often plan smaller than feasible amounts so I felt good about not spending on such things, then felt bad when I exceeded the budget amounts. Now I have a budget where I can check off that I have paid myself and met my obligations, then I feel fine about spending the rest any way I please.
The funny thing is that the small, frivilous expenses seem to expand to your available cashflow, and while it may seem impossible to set aside 10% to pay yourself with, if you take it out first your spending adjusts to fit.
