Let’s borrow a term from economics. Do you tend towards looking at your finances in a macro (big picture) or a micro (bottom up) way?
In other words, do you just worry about the direction of your assets and overall numbers, or do you look at every little expense separately?
Characteristics of “Micro Money”
I’m calling the people who thinks from the bottoms up “Micro Money”, which I believe I am. While I have a budget and look at the final overall number, I tend to think of every expense as a separate entity instead of having a budget for every spending category.
I’m pretty frugal, and my conservative nature helps my financial picture take care of itself. But this can be dangerous. If I don’t keep a tight standard of “appropriate spending”, my expenses can balloon, and lifestyle inflation can easily creep into my life.
Micro Money seems to work best for people who are frugal, disciplined and like saving money rather than spending it. This method isn’t so hot if you can’t control your emotions or if you love buying.
I know the saving money rather than spending part sounds funny, but I actually like accumulating dollars rather than stuff.
Characteristics of “Macro Money”
Macro Money is the way companies handle their finances. Due to many levels of management and countless needs and ways to spend money, it is impossible for one person, or one management team to analyze every expense before it’s approved. That’s why businesses have meetings and decide on a budget, which is then used to determine what type of spending is or isn’t possible for the coming year.
Many individuals follow this method too. They setup categories and then try to put a limit on each for a certain period (usually monthly). They then just spend away until they hit their limits. When successful, the overall result will be positive by definition.
There are two main disadvantages with this though.
1. Flexibility – While this helps those who aren’t disciplined because it’s much easier to think of a total then to control every expense, this formula breaks down when you need to purchase a big ticket item. What if your car breaks down and you need to buy a new one? I’m pretty sure no one is going to set a monthly schedule of $10,000 on car expenses. Having an exception seems to be the only solution, but what’s the point of rules when there are tons of patches?
2. Encouragement of Spending Close to the Limit – Setting limits urges us to spend close to maximum. Let’s say you put a limit of $500 on each category a month. If you still haven’t spend a dime on entertainment and it’s already the 18th of the month, it will likely push you to go out to the movies.
But then there are also positives. As mentioned, those who are more emotional with their spending will have much better success with a limit. Setting up the limits when you have a cool head and have all the numbers in front of you is much easier than trying to conserve every time you want to pull out your credit card.
I do a little of this too, like tracking my progress through a budget and a tally of my net worth. However, I don’t set category limits. Instead, I justify every expense and spend accordingly. This means that I will often spend quite a bit on a category in one month and at other times nothing at all.
It works for me, but it may or may not work for you. So, are you Macro Money or Micro Money? I assume everyone does a little bit of both, but which is your predominant side? Bottoms up or top down?