Set points

Have you ever heard of set point theory? At it relates to health, set point theory essentially states that your body has a normal set range for weight. Ever go on a cycle of diet and exercise, lose weight, only to see it return?

According to this article on healthline.com:

“set point theory states that our bodies have a preset weight baseline hardwired into our DNA. According to this theory, our weight and how much it changes from that set point might be limited.

The theory says some of us have higher weight set points than others and our bodies fight to stay within these ranges.”

With weight control, habit and biology might be fighting against your fitness efforts. I think there’s a similar effect with money.

“Budget” is a bad word

One of the finance words I really don’t like is “budget.” More money has been made off that word by “financial gurus” than almost any other word…. well, except maybe “retirement.”

The trouble with budgeting is all the negative associations with the word. It’s restrictive. It raises anxiety for a lot of people. You feel like you need permission from yourself to spend money against your prior commitment to yourself. You justify not granting that permission with phrases like “it’s not in the budget” or “it’s no-spend November.”

Here’s the thing, though. The word budget is deeply engrained in our financial lexicon. For some of those gurus, the ability to successfully budget proves you have basic financial literacy. Being prudent to spending less than you earn is financially healthy, much like being prudent to consume less calories in a day than you burn is physically healthy.

So we need a word, something to call this spend less than you earn, be fiscally sound thing.

To save us all the cringe association, let’s replace the word “budget” with the words “cash flow.” Ah, cash flow. Doesn’t that sound nice? Cash is flowing, sometimes in, sometimes out. I think there’s a better mental and less anxiety producing association with cash flow.

Revenue and Expenses

Let’s go back to set point theory and bring money into the picture. For those who are on salary, the amount of money you bring in on a regular basis is fixed. Maybe you get a bonus once in a while, but that should never really be relied upon for cash flow planning. For those in commission or performance-based business, you may have an average income range that tends to be consistent.

This is one area – bonuses – where a lot of people get tripped up because they’ll plan expenses based on the bonus they received last year, or even worse, on an expected tax refund in the spring. Some people absolutely mistake that for a bonus check, but that’s a rant for another post. But I digress…

You might think of this as our expected top line revenue (salary), with the possibility of growth (a bonus) along the way. Then, you have expenses – and this is where the set point theory comes into play.

First are fixed expenses: mortgage or rent, car loans, insurance premiums – anything with a required payment that is fixed. Then, there are variable expenses: utilities, groceries, fuel – anything still necessary but not a fixed cost. Finally, what’s left are discretionary expenses: gym membership, streaming services, dining out – anything that consumes cash that you could cut if needed.

Set Points and Money

Once the fixed and variable expenses are paid each month, our lifestyle starts to take over. You get used to spending a certain amount of money on a monthly basis. Sometimes you spend more than usual because of an unexpected expense, or maybe you “treat yo self” with a little fun money.

But then, your spending reverts back to it’s normal range. If it starts to feel out of control, you might start looking for places to cut. The popular victims are eating out, streaming subscriptions, cutting back on vices, charitable giving, etc. That usually lasts for a few months. You start to give in a little here and there and before you know it you’re back to your previous normal spending range.

Sound familiar? How’s your new year’s resolution to lose 10 pounds coming?

With money, it’s more like habit and psychology might be fighting against your fiscal efforts.

Since cash flow is a more comfortable word, let’s talk about how to manage the set point effect on your money.

First, spending money is not a bad thing. Saving money is not a bad thing. However, it’s actually easy to do a financially unhealthy amount of both. You’re probably asking how in the heck saving too much can be financially unhealthy.

Well, it’s simple actually. People who over-save have intentionally lowered their spending range, which can be healthy for a time. However, they’re actually running the risk of starving their current lifestyle for the benefit of a future one they may never get to enjoy. Or, another risk is reaching a point where they’re tired of saving and they start consuming at a high rate. An exception here might be someone who earns far above average and still keeps their expenses low. Unspent money accumulates easily.

Outside of the exceptions, because many people know what they’re going to earn any given month, they also have a good idea of what they can spend. Some people could not tell you how much they spend on a monthly basis, but they may know it’s less than what they earn.

Make Your Flow… Flow

Those “financial gurus” who give the blanket advice like eat rice and beans, never go to a restaurant, cut up credit cards, and things like that are ignoring how the psychology of money works. While those financial control mechanisms can be helpful to some, and there are lots of success stories that I’m not attempting to diminish, those very mechanisms can be harmful to others.

Why? Set point theory. You have to control the flow of money and rapid increases or cuts can be harmful to financial health, much like rapid weight loss or gain can be harmful to physical help.

According to a fitness instructor I know, you can carefully lower your set point range over a period of time. The body is programmed for where it is now – that’s homeostasis. You can work it lower, then allow the body to adjust and reprogram, and so on until you reach your desired healthy weight. But once it’s there, you have to keep up the effort to keep your body there. Otherwise, you’ll start moving right back up to where you started.

The same is true with cash flow. If you want to spend less, increase savings, pay off debt, or put money aside for a planned purchase, you have to make defined decisions about how to do that and then work it into your cash flow over time to get your money mindset used to the change.

Financial considerations are like bodies – everyone is different, and what works for some may not work the same for others. This is part of the work of financial planning – understanding how changes in your financial habits impact your financial health, and how you mentally and emotionally adjust to those changes.

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