Sunday, December 18, 2011

Applying the theory of constraints to your spending

Adherence to Mustachianism entails the reduction — nay, the obliteration — of one's expenses. While Mr. Money Mustache has laid out myriad money-saving tips, frugality principles, and lessons to live by, the path toward Mustachianism is necessarily personal. Just because MMM tells you to bike doesn't mean he's going to sell your car for you, figure out how to adapt your lifestyle to one of a cyclist, and then give you rides to and from work in his bicycle trailer. You do the legwork yourself.

I'm the kind of guy who relies on gradual improvement over time. There's a part of me who wants to go cold-turkey on spending, turn the thermostat down to 65°F, run to work every day, and subsist on Ramen and PB&J sandwiches. That's not me though. Not to mention my girlfriend would break up with me after a week. So I'm trying to take an iterative approach to my spending.

My general plan was to identify the biggest expense that has the most fat to trim, then focus on it until it's meaningfully reduced or I hit diminishing returns, then repeat the process. I'm not the genius who came up with this first, though, I'm just applying an awesome management philosophy to Mustachian goals.

The theory of constraints is a management paradigm that's meant to keep an organization continually focused on its goal. It's based on the premise that achieving the goal has at least one bottleneck — one link in the value chain that's lagging behind the others.

Paraphrased from Wikipedia, the steps are:
  1. Identify the constraint
  2. Decide how to exploit the constraint
  3. Subordinate all other processes to the above decision
  4. Focus all effort on breaking the constraint
  5. If the constrained has moved, return to Step 1
This is my strategy for reducing my spending over time. There will always be one or more things I'm spending too much money on, or I could find a better deal on, or a way to more efficiently spend my money to achieve my goals.

One of these days I'm going to take a high-level analytical view of my spending and expenses, and make a sort of theory-of-constraints road map. I want to be more explicit about what's on my docket for budgetary improvement, not least of all to keep myself focused.

But I wanted to get this out there sooner rather than later. The theory of constraints is a valuable tool for thinking about your budget as you make your way toward financial independence.

1 comment:

  1. The TOC applied to the end goal of financial independence is a very compelling idea. I look forward to reading more on your blog about the practical application of this concept.