This is the article with which I competed in the Personal Finance Olympics. Enjoy!
Doing our household accounts has become a ritual of mine – at the end of the month I sit in my study with a nice espresso and pour over spreadsheets, cash flow statement, receipts and handwritten notes.
So guess what I did couple of days ago? Yep, I did the accounts! This time my mind was also working (part-time) on the topic for my Personal Finance Olympics finalists’ submission, namely what is the one financial ‘golden rule’ that I have abandoned in our post-recession economy.
Then I saw it; the answer was staring at me from the spreadsheet!
Budgets are reflection of our lives, right? Then looking at our budget, I realised that our lives had become too much about hard work, duty and needs and too little about play, joy and the things that nourish our souls.
Our monthly budgets spoke clearly of people who obey the ‘commandments’ of personal finance.
- We have not spent more than we earn for close to three years now and in fact our cash flow is increasing steadily;
- Most of the increased cash flow has been going on paying down a loan, largely a result of a business gone bad during the recession. This will be paid off seven years early.
- Our budgeting murmured about being flexible with the more advisory rules of personal finance, like having large cash savings – when inflation is running a riot and the situation in Europe may get so much worse this probably is not a smart move.
But the one rule of personal finance that we have certainly abandoned during the last year or so is about having fun and budgeting for it.
This rule is about setting aside a proportion of income every month for having fun and doing the things that make us feel that ‘we are worth it’: this proportion can vary but the rule of thumb is that it should be between 10 and 20% of income.
I call this the Cinderella rule of personal finance – it is often ignored even during times of prosperity; during periods of economic and financial hardship it is usually relegated to the dusty hearth of our existence and most people spend virtually nothing on the things that are neither useful nor necessary; the things that are simply desirable, refreshing and enriching.
Our way to ensure that we don’t fall into the trap of being ‘all work and no play’ family was to start a ‘we’re so worth it’ fund. Every month we transfer 7% of our income in it (which is probably fairly modest to begin with).
It worked for about a year: we used this fund to go to the theatre, to concerts and generally do the things that nurture our souls. But, as our budgets show, for the last year or so this money has been transferred back into the household account regularly. Our spending on fun is limited to a subscription with LoveFilm, the occasional visit to the cinema and accidental swimming sessions.
Has our income gone down during this time? No, quite the reverse! So, what can explain this, I started wondering.
I believe that we have abandoned the Cinderella rule of personal finance because of the unprecedented level of uncertainty that characterises the economy today. Economic and financial volatility has meant that we had to surrender even the tiniest speck of safety and security. We no longer know whether and for how long we’ll have jobs; whether our pension schemes will survive, whether our shares will still be worth something in the morning.
We humans can cope with relative certainty, even when it confirms our worst fears.
When the level of uncertainty rises our reaction is to try and reduce it.
Reducing the level of uncertainty, and the corresponding insecurity, in our lives can be achieved by making sure we create more stable conditions for the future. These may include increasing the level of our savings, reducing and eliminating debt, paying off our mortgages and making ‘solid’ investments like buying real estate and land.
Our way to reduce uncertainty has been to lower our liabilities and the price we have been paying is the budget for having fun.
In the long run cutting out, or even dramatically reducing, the personal budget for fun is counterproductive: we perform as we feel and feel better when we enjoy our lives.
I am taking Cinderella back to the ball so that I can live and love my live not simply survive it! How about you?
photo credit: At The Last Stroke Of Midnight, The Spell Will Be Broken via photopin (license)