One of my favorite hobbies is taking on multi-day hikes in the Appalachian Mountains near my home in Maine. There’s no better way to clear my mind than actually living outside in a beautiful place with a clear goal in mind.
When I map out these hikes, I consider many hypotheticals. How many miles can I hike on average? How much weight can I carry? How far do I need to get on each day to stay the night in the best shelters?
I make a hypothetical plan before I go out. That’s the smart thing to do! But the second I take my first step on the trail, that plan always changes. Why? Because my hypothetical plan meets the real world, often with unexpected conditions and circumstances.
I remember one dramatic hike a few years back. We got far more rain than was forecast. I had planned to cross this stream, but when I got to the stream, I met another hiker who’d just fallen into the water because it was so deep. He was quite unnerved and had decided to get out of the woods. I was hiking with my dog at the time, and there was no way I was going to risk both our lives. So I joined this hiker and we got a ride out on a nearby logging road.
I had done my part. I checked the forecast and made a reasonable plan. But the trail conditions on the ground were simply too dangerous to continue. My hypothetical plan had met reality.
When it comes to money, we tend to let two worlds collide—the hypothetical world and the real world. And when those worlds collide, that can spell disaster.
The problem with spending monopoly money
It’s natural to want to create a plan for your money, especially when you’re new to YNAB and hyped up to get the party started. But the tendency at that moment is to create a plan with hypothetical dollars instead of real dollars.
In other words, we plan with monopoly money, but spend real money.
Why is that a problem? You can’t spend monopoly money at the store, my friends. They only accept real dollars. It tends to go like this:
“Well honey, we’ll bring in $6,000 by the end of the month, so let me go ahead and make a plan for that money.”
But in the real world, all that money hasn’t hit the bank yet. The plan is based on the hypothetical. Again, I must stress: you cannot spend a hypothetical dollar in the real world. (Wouldn’t that be nice?)
There’s nothing wrong with planning
Look, planning is important. There’s nothing wrong with hypothetical planning; it has a role to play.
When I plan a long distance hike, I grab my maps and figure out the following:
- How many miles will I walk each day?
- Where will I camp?
- How many nights will I tolerate tent camping?
- How much food do I need to bring?
- What towns will I cross and where will I resupply?
This is my way of determining how likely it is that the hike will be successful. If I know my average daily mileage is 12 miles, but my hike calls for 15, the chances of success diminish. If I know I can only carry 7 days of food, but I’ll have to carry for 9—I’m in trouble before I even put on my backpack. It’s true: hypothetical plans are critical for getting your head oriented.
In YNAB, we encourage planning with Targets. They’re your way of saying, “This is what I’m planning to spend. I’m weighing my needs, thinking about what we will make and I’m going to build a plan around that.” But once you step into the real world, things are different. This is true with money—and hiking.
The real world needs a new plan
I may have a perfectly reasonable hiking itinerary all written out, but as soon as one foot hits the trail, you’re in a different situation—we call this reality. Now you’re faced with more timely variables like:
- How do I feel right now? Do I have enough energy for this?
- What’s the weather actually like today?
- Have I eaten enough to fuel me up this mountain?
If it rains hard, that will slow me down. If there’s a big mountain range to get over that will take longer than crossing a field. If the heat is bad, that could also slow me down.
Now imagine your hypothetical money plan hitting the real world.
Sure, you set aside:
- $2,000 for the mortgage payment
- $200 for electric
- $750 for groceries
- $300 for gas
- $500 for car repairs
- …. and so on and so on.
You made a plan for that future $6,000, remember?
But there’s only $3,000 in the bank right now. What are you going to do? If you pay the mortgage, can you also buy all the groceries and gas? Well… no. And you certainly can’t cover a car repair.
But before you head out to spend, we need to add a step that grounds you in reality. That’s why we give every dollar a job. There’s tremendous power and clarity in only assigning jobs to dollars you already have.
To get you there, just ask yourself: “What does this money need to do before I’m paid again?”
Your reality-based plan might look something like this:
THAT plan is one you can take out into the real world and spend from. You can trust that plan. You can’t trust the hypothetical plan in the grocery store. (Heck, I barely trust myself in the grocery store!)
If I try to use my hypothetical plan out in the real world, I’ll find myself saying, “Wait… where are the real dollars?” Then I’m back to hiding under the sheets from my finances and hesitantly checking bank account balances—so why even bother having a plan at all?
Again, hypothetical and reality-based plans are both useful. But let’s keep them separate so these worlds never collide.
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