Thursday, February 25, 2010

The Wealth Watchers Idea

Here’s yet another personal finance plan, Wealth Watchers, by Alice Wood. Refreshingly, she does not come by her interest in personal finance from a background of having totally screwed up with credit cards and being addicted to shopping as therapy—or has she? She actually did endure a period of being in financial hot water, but it was the result of a brain injury that suddenly made it hard for her to keep track of every aspect of her life, finances being just one. Her solution was to take the well-known Weight Watchers point system and use it to plan daily spending.

I’ve encountered this concept only once before, in a television show about lottery winners. One lucky man now lived the high life in a mansion filled with very expensive furnishings, and all the rest. But he said that he knows exactly how much money he can afford to spend each day, and he never spends more than that amount. He lives off the interest he earns on his fortune instead of using up the principal. Unlike most lottery winners, he still has most of his winnings. He can reasonably foresee a comfortable financial future.

Alice Wood’s idea is the same as the lottery winner’s. You calculate how much you can spend per day and not go into credit card or other debt. When you reach the limit, you stop spending. This method has one beautiful aspect to it that I really like. It’s perfect for people who are perpetually foggy about what income is coming in and what they owe. It’s also perfect for people who are prey to impulse or bulk buys. Even if they are the type to rob Peter to pay Paul, to spend next week’s allotted cash on this week’s purchases, at least this method shows them how much total they can safely spend. People’s brains do work differently from each other. It’s nearly impossible to get certain types to pay constant attention to the big picture. Others are lost in endless minutiae. What Alice Wood has come up with is not a budget style per se. She has figured out a routine. The only hard part is the prep work, which requires you to learn what your carrying costs are by keeping track of them. Then you can break down your budget to fixed, semi-fixed, and discretionary expenses.

How do you separate your fixed expenses from your semi-fixed expenses? The fixed are the bills that must be paid and cannot be adjusted. These include

• Rent or mortgage
• Car payment

Here is where I disagree with Wood, because she includes several other items in fixed expenses that I don’t consider fixed. The next group, semi-fixed expenses, is my list. On it are items that can be modified by our actions:

• Car/Home/Life insurance
• Electric/Gas/Heat/Phone/Internet/Cable
• Day care/Private school/College
• Savings/Tithing/Charity
• Taxes/Medical
• Food

Wood does not include food as any kind of fixed expense, probably because it can fluctuate wildly depending on your style. But, like utilities that can be reduced by taking a cheaper Internet or cable package or turning the thermostat down, food costs can be modified via more or less eating out, buying of takeout, or home cooking. Every item of semi-fixed expenses is negotiable, but they are fixed to the degree that you have to have them. You must eat, but you can decide to spend less on food. You must insure your car, but you can find less expensive car insurance, or drop the collision on an older car. You can buy a premium cable package or just basic. You can skip going to doctors, although I don’t advise that, but you can decide to go to an immediate care clinic rather than an emergency room and that can drastically affect your medical costs.

A couple of items don’t fit these lists. You can choose to save, tithe, or give to charity; savings perhaps doesn’t belong in fixed as Wood has it, or in semi-fixed as I do. But it is not a necessity of life. And you may question whether taxes belong in the fixed or the semi-fixed list. We each choose the amount of our income tax withholding. Thus we can have more or less in our paychecks, and more or less in our refunds. Or no refunds at all. We also can choose the level of medical insurance we buy, if we have medical insurance. That’s why these ordinary expenses of life are semi-fixed. We can fiddle with them.

The bottom line of the Wealth Watchers program is that after all the fixed and semi-fixed expenses are tallied up and subtracted from your income, what’s left is your discretionary income. If you have included semi-annual expenses in your calculations (such as dentist visits), you can arrive at a daily figure you can safely spend on the items that are not fixed or semi-fixed.

Don’t imagine that it is easy to decide what you should spend on most of these expenses. Fierce arguments break out in many houses over how much should be spent on cable or telephones. People debate whether wine is a necessity of life and thus in a basic food category, or whether it is a luxury and thus firmly in discretionary. For Wood, food is all discretionary, but most of us are more comfortable with a baseline we expect to spend on food, thus making that figure semi-fixed. But we still argue over what is a food necessity versus a luxury.

To be frank, I think that Wood underestimates the difficulty of arriving at the safe daily spending amount. A book that is superior to all others in this regard is Make Your Paycheck Last, by Harold Moe. But Wood’s idea is something that one person in a family can do the work to compute and then others in the family can live by without concerning themselves with the big picture. It’s also possible to have a paid financial advisor calculate it all. Then the finance-impaired (or just bored) individual can still adjust spending to a safe level without going mad trying to figure out what that level is. And let’s be realistic; many people fall into this category. They don’t want to think about money. They just want to know if they can safely spend $20 or $2,000 today. Alice Wood’s book gives a good road map for making it possible.

1 comment:

Anonymous said...

Thanks so much for your review of the Wealth Watchers book. It was so interesting to read your impression of what works and doesn't work for you about the Wealth Watchers concept. One thing people really struggle with is how to set a daily goal when your income changes from week to week. I'm in the same boat and I just take a conservative approach about how much I think I will earn on average each month. Even if it's not a perfect system, it's been a huge help to me to take on every day as though it makes a difference.

Thanks again for mentioning Wealth Watchers on your site.

Alice Wood