This is part 2 of my interview with J.D. Roth, the publisher of the personal finance blog Get Rich Slowly and the author of Your Money: The Missing Manual, which was recently published by O’Reilly Media. (Here’s part 1 of my interview with Roth, where he talks about his decision to learn about personal finance, and about the importance of setting realistic and measurable financial goals.)
Your Money: The Missing Manual lays out a plan for getting out of debt, making and keeping a budget, and investing for the future. Really, the book is about how your financial decisions play a role in the larger goal of establishing a way of life that’s personally rewarding and meaningful.
I interviewed Roth about the ideas in his book. Over the next few weeks I’ll be running the interview as a series of posts. In this first post,
Mark: You have some good tips for curbing compulsive spending.
J.D. Roth: I used to be the kind of person who would go into a store and I would see a DVD or a CD or a computer game or, or whatever it is, and I would want to buy it right then. If I didn’t have the money, I’d charge it. I’ve discovered a technique that I call the “30-day waiting period,” which helps you sort out the things that you really do want or need from the things that are just compulsions.
Rather than buy something to satisfy that compulsion, I delay it by waiting 30 days. I go home and I put it on a list with the date next to the item. Then I wait a month. I've found that many times the temptation for that particular item fades. It’s just something I wanted in the moment because it sounded good.
I use the Amazon wish list in my “waiting period” technique, too. There are so many things I want that I just dump them all on the Amazon wish list and then they sit there for months at a time. I just went through it the other day and I cleaned out about 50 different items that have been on there for a long time that I don’t need.
Now, one important point here is that if you come back to the list after 30 days and say, “You know, I really do want this item,” well, then find a way to do it that makes sense financially.
Mark: Now, let’s talk about budgets, which you cover in detail in your book. What’s your preferred way to set up a budget?
J.D. Roth: There are all sorts of different ways to do a budget, and I think there’s no one right way. I’m all about finding the ways that work for you, but the thing that works for me is to do a “broad budget.” This is something I learned from Elizabeth Warren and Amelia Warren Tyagi their book, All Your Worth: The Ultimate Lifetime Money Plan. Instead of looking at details, like how much I’m going to spend on comic books, and dining out, and clothing each month, I try to look at a broad picture, using what Elizabeth Warren calls the “balanced money formula,” which says “keep your spending on needs below 50 percent of your income.” Needs are things like your housing, your transportation, your basic food (not dining out), and if you can keep that below 50 percent, you’ll be able to have money for the other things. One of these other things is savings. Your goal there should be to save at least 20 percent of your income. I know that for many people 20 percent sounds like “Oh, my gosh, that’s a lot of money!” and it was for me when I started too, but your goal is to get to that 20 percent. And then everything that’s left over, which is roughly 30 percent, you can spend on “wants,” which are anything — dining out, ski weekends, anything that floats your boat, basically. I found that by adhering to this broad budget framework it really freed me up from having to focus on all the little stuff because a budget was too restrictive. I was frustrated by budgets but now that I do this, it’s a lot easier for me.
In part 3 of this interview, J.D. Roth discusses how to make smart decisions when it comes to buying a house, car, or other major item.
Mark Frauenfelder Credit.com contributor, editor-in-chief of MAKE magazine and the founder of the popular site Boing Boing, Mark was an editor at Wired from 1993-1998 and is the founding editor of Wired Online. He covers creative DIY projects and how-tos that will help you make the most of your money.
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