I used to think that there was no point in trying to manage my money effectively, because I wasn’t making enough. Then I started to think about my money in ratios, not rands.
The problem (and blessing) with my money is, I’m a freelancer. I can’t count my money before it’s hatched and I never know how much I’m going to make in a year.
I’ve had some really lean years when I didn’t work for 5 months. I’ve had some bumper years where I’ve made 50% more than what I made the year before. There’s no way to tell what I’m going to make and there’s very little control I can exert over that variable.
If I want to save R5000 a month, I have to be in a circumstance where I can guarantee that I’ll have R5000 a month to save. That’s unrealistic as a freelancer, so I could shrug my shoulders and feel defeated by the reality that I don’t necessarily have R5000 to save.
But, if I’m determined to save 30% of every paycheck, whether it’s twenty rand or twenty thousand, it’s a 30% savings rate. And that adds up fast.
I’ve found that, by thinking in ratios and not rands, I make sure I’m treating all my money as the same.
But isn’t all money the same? Well, basically yes. But we’re human beings and we don’t really treat money that way. We think of ‘this money’ we got as a tax refund as special, magical money that doesn’t follow the same rules as ‘that money’ we earned as income from our job.
In a similar way, we tend to think of the money we will have in the future (and that fantasy future money is usually not a tiny amount either; a lottery win or an inheritance or the big new job we deserve) as the ‘real money’ we will use to do real, adult things with.
The problem is, that’s not true. Ratios work the other way too; if we can’t manage small amounts of money, our levels of responsibility are very unlikely to scale up to managing a huge windfall.
Related: The Power of the Savings Ratio
The perks of ratio’d thinking
By thinking in ratios and not rands, I’m no longer passing the buck to future me and what future me makes, and I can look to what I have today.
- Ratios encourage me to think in large chunks: 10%, 30%, 50%. That keeps things very simple and straightforward. And budgets and finances should be simple and straightforward, otherwise they’re hard to stick to.
- Ratios encourages me to prioritize and idealize about my money. 100% of my money can only be chunked up so many ways. So what’s really important to me? What’s the story I want my money to tell? With goals and a motivating impetus, money becomes simple.
- Ratios are fluid: I might gear all my free income to getting out of debt while I have debt to get rid of, and slide back into more equitable chunks when I’m in a better place financially.
- And finally, ratios encourage me to treat all my money with respect. No amount is too small and too insignificant. All money is equally fungible and capable of getting you to where you want to be.
So don’t despise the small beginnings. No beginning is too small to not count.
Note, I’m not a financial advisor and this is not financial advice.
Article reposted with permission from Drawing Money.