Lesson 1, Topic 1
In Progress

Optimizing your Dynamic Spending Plan

Now that you’ve worked out the basics of your Dynamic Spending Plan, you can make some targeted improvements to tweak your spending and make your money go where you want it to go. Instead of having this dull, throbbing cloud of worry over your head, your plan will serve as a living, breathing system that signals you when something’s broken. If the alarm bells aren’t going off, you don’t need to waste time worrying.


Optimizing your spending can seem overwhelming, but it doesn’t have to be. You can do a “Pareto Analysis”, which often reveals that 80% of your overspending is on 20% of your expenditures. That’s why it’s better to focus on one or two big problem areas and solve those instead of trying to cut 5% out of a bunch of smaller areas.

Let’s take an example: Matt takes home $48,000 per year after taxes, or $4,000/month. According to his Dynamic Spending Plan, here’s how his spending should look:

  • Monthly Fixed/Variable (60%): $2,400
  • True Expenses/Savings (15%): $600/month
  • Investments (15%): $600/month
  • Spending (10%): $400/month

Matt’s problem is that $400 isn’t enough for his spending money—this plan leaves him $250 short each month. What should he do?

Bad answer: The superficial answer is to that Matt can decrease his contributions to his long-term investments and savings goals. Sure, he could do that, but it will cost him down the line.

A better way is to tackle the two most problematic areas on his monthly spending: monthly expenses and spending money.

Good answer: Matt decides to pick his three biggest expenses and optimize them. First, he looks at his monthly expenses and realizes that because he’s been consistently paying the minimum monthly payment on his credit card debt at 18 percent, he has $3,000 of debt left. Under his current plan, it will take him about twenty-two years and cost him $4,115 in interest to pay off his debt. But he can call his credit card to request a lower interest rate. With his new lower credit card APR of 15 percent, it will take him eighteen years and he’ll pay $2,758 in interest. He saves fifty-three months and $1,357 of payments. That’s only $6/month, but over eighteen years it adds up to a lot.

Next, he checks his subscriptions and realizes he’s been paying for a Netflix account and a Star Wars membership site, both of which he rarely uses. He cancels them, saving $60/month.

Finally, he logs in to his money-management account at http://www.ynab.com and realizes that he’s spending $250 eating out each month, plus $150 at bars, or $400 in total. He decides that over the next three months, he’ll slowly ratchet that amount down to $200/month, saving him $200/month.

Total amount saved: $266/month. By adjusting his spending, Matt is able to create a Dynamic Spending Plan that works for him.

Matt was smart to focus on changing the things that mattered. Instead of promising that he’d stop spending money on Cokes every time he ate out, he picked the big wins that would really make an impact on his total dollar amount. You’ll see this a lot: People will get really inspired to budget and decide to stop spending on things like appetizers with dinner. Or they’ll buy generic cookies. That’s nice—and I definitely encourage you to do that—but those small changes will have very little effect on your total spending. They serve more to make people feel good about themselves, which lasts only a few weeks once they realize they still don’t have any more money.

Try focusing on big wins that will make a large, measurable change. In fact, I focus on only one or two big wins each month: eating out, and buying books because I am a huge, huge dork. You probably know what your big wins are. They’re the expenses you cringe at, the ones you shrug and roll your eyes at, and say, “Yeah, I probably spend too much on ____.” For most of my friends, these big wins are eating out, drinking, and Amazon.


Last year, a friend of mine started getting really into fitness. I think it was because of his laughable goal of “getting some girls.” Kudos, sir. Anyway, he started working out a lot: going to the gym in the morning, running during the day, then hitting the gym again at night. Needless to say, this fitness program didn’t last long. Do you know people who get so into their idea that they go completely overboard and burn out? I would rather do less but make it sustainable. The problem is that that’s rarely sexy.

This idea of sustainable change is core to personal finance. Sometimes I get texts from people who say things like, “Mike! I started managing my money! Before, I was spending $500 a week! Now I’m saving $495 of it and putting it into a bank account!” I read this and just sigh. Although you might expect me to get really excited about someone contributing $495/month to their savings, I’ve come to realize that when a person goes from one extreme to another, the behavioral change rarely lasts.

When I make a change, I almost always make it bite-sized in an area that matters and work in increments from there. This is why I just shake my head when I see personal-finance pundits giving families advice to go from a zero percent savings rate to a 25 percent savings rate (“You can do it!!!”). Giving that kind of advice is not useful. Habits don’t change overnight, and if they do, chances are it won’t be sustainable.

For example, if I started keeping track of my expenses and discovered I was short $1,000/month (this happens more than you think), I’d pick the two big wins—two items that I spend a lot on, but know I could cut down with some effort—and focus my efforts on them. Say I was spending about $500/month eating out, here’s how it would look:

Month 1: $475 on eating out
Month 2: $450 on eating out
Month 3: $400 on eating out
Month 4: $350 on eating out
Month 5: $300 on eating out
Month 6: $250 on eating out

It’s not a race, but within six months, I’d have cut my eating out budget in half. And it’d be much more likely to be sustainable.

The other way to do it is to look at your current spending, freak out, and cut half your total spending. Then you’re suddenly forced to spend in a completely different way, without the means to cope. How long do you think your ambitious spending goal will last?

How many times have you heard friends say something like, “I’m not going to drink for a month”? I don’t understand the point of short-term whims like that. A month from now, okay, you spent only 50 percent of what you normally do. And . . . then what? If you can’t keep it up and you bounce right back to your normal spending habits, what did you really accomplish? I’d rather have people cut their spending by 10 percent and sustain it for thirty years than cut 50 percent for just a month.

Whether you’re implementing a change in your personal finances, eating habits, exercise plan, or whatever . . . try making the smallest change today. Something you won’t even notice. And follow your own plan for gradually increasing it. In this way, time is your friend because each month gets better than the one before it, and it adds up to a lot in the end.


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