Obscured by deadly tsunamis, nuclear meltdowns and revolutionary trends in the Middle East, the price of gas is rising and now threatens to impact all of us. “According to the U.S. Department of Transportation and EIA, the average U.S. household purchases a little over 1,100 gallons of gasoline per year.” (Click here for reference.)
Only one year ago, gas prices nationwide were at manageable levels. At $2.85, the average U.S. household was spending $3,135 annually. A year’s worth of gas at today’s prices could easily cost $4,400—an additional $1,265 per year or $105 per month. Not exactly pocket change. And with some analysts predicting a near certain $5.00 per gallon, we must consider those costs—an estimated $2,365 more than last year or $197 more per month.
This is an increase that won’t be easily absorbed by the vast majority of households. In addition to the pain felt directly at the pump, we also have a host of existing economic problems indirectly, but materially, impacted by the spike in fuel costs:
higher fuel costs = inflated cost of goods and services = reduced consumer spending
+ already wobbly economic recovery = possible double-dip recession (and all its friends)
What can you do? That’s the wrong question to ask. What will you do? The short answer is to control what you CAN control. Your argument with your brother-in-law, your Twitter gripe or Facebook rant may provide an opportunity to vent, but it isn’t likely to change U.S. energy policy or impact the actions of the Federal Reserve or start a revolution in the Middle East (wait a second). I’m not suggesting we stifle a healthy, open debate, but we must not fool ourselves into thinking our responsibility ends with our voice being heard. You have little control over U.S. energy policy and some control over your income, but complete control over your spending.
The number one indicator of a healthy financial household is its cash flow mechanism. This is a two-fold process managing the present by analyzing your actions in the recent past and predicting them in the near future. Some call it budgeting, but since that term has a tendency to draw as many readers as a detailed report of a colonoscopy, we’ll call it margin management. Businesses without profit margin fail. Why would we expect any different of our household finances?
The only constant in our financial lives is change. Change requires flexibility. Surprises require margin. And failure requires grace. So, if you’ve failed at margin management to date, give yourself grace. Recognize the inevitability of change and submit to the most fundamental fiscal discipline of cognizant cash flow management. And yes, deprive yourself of some level of comfort today to build margin into your financial realm so that when surprises occur, you’re prepared.
How does margin management work? Margin is deliberately setting aside funds for the unexpected. It’s simple, but it’s not easy. (Check out this hysterical Saturday Night Live skit entitled “Don’t Buy Stuff You Cannot Afford.”) It’s basic math, but behavioral management (especially our own) is horribly challenging. We must set aside money today (which we’d like to spend) for future expenses (for which we’d prefer not to pay). Each virtual envelope in our cash flow system should be filled with an amount slightly beyond our typical expenditures. Then, we should have a distinct category labeled “margin” or “buffer” or “slush.”
My two favorite tools for margin management are Mint.com and YNAB.com. Mint is the best free online personal finance tool I have seen. It aggregates all of your accounts and does half the work of margin management for you. YNAB stands for You Need A Budget (You Need A Margin Manager just didn’t have the right ring to it) and is a software-based tool with a $59.95 price tag. It’s nothing short of a life-changer for those who dedicate themselves to its precepts and process.
Last night, for the first time since college (the ‘90s), I put less than a full tank of gas in my car. I’m not going to lie; my pride took a hit as I arrived after and left before my fellow citizens who chose to fill ‘er up all the way. But I completed the last leg of my journey home satisfied knowing I kept within the confines of my car expense budget for the month.
freedom from discipline = no margin = bondage
strategic discipline = margin = freedom
NOTE: This post first ran on Tuesday of this week in a new column I’m writing for TheStreet.com.