Applying GTD principles to your personal finances – Part 2

GTD for your personal finances
In my previous post about GTD for personal finances (part 1), I covered some basic ways to apply GTD principles in managing your personal finances. Here are 5 more ways you can apply GTD principles to your finances.

GTD principle: Don’t burn unnecessary cycles.

GTD is about efficiency. You ideally should only have a thought once before it’s stored in your trusted system. Otherwise you’ll burn unnecessary psychic energy thinking, worrying, stewing, or remaking decisions about the item. Make a decision once and then take action at the appropriate time and place.

Personal finance principle: Make decisions once and keep a record of them

One mistake couples make is that they burn unnecessary cycles talking about the same topics and making the same decisions over and over again. Not only is it unproductive, it’s emotionally draining and taxing on the relationship.

To remedy this situation I recommend setting up a financial binder (a standard three-ring binder will do) and keeping a record at each financial meeting about what you discussed and what decisions you made. Whenever you have a “didn’t we already talk about this” moment, you can refer to your notes. Your notes don’t need to be long and can often take the form of a simple list of decisions.

Here are some of the decisions (and lists) my wife and I record.

  • The situations that we have agreed count as emergencies and would justify using our emergency fund.
  • A list of large purchases we’d like to make. This makes it much easier to negotiate when we receive a windfall.
  • Our previous months’ budgets for reference
  • Net worth statements (updated quarterly)
  • Outlines of major discussions and decisions made
  • Travel plans and budgets
  • Gift giving plans and budgets
  • Record of how we used bonuses, tax returns, or other windfalls
  • Prioritization of high-level goals (save emergency fund first, pay off debt next, etc.)
Paper records

I am a big advocate of keeping a paper binder in addition to a digital copy of these records. Once you’ve printed out a spreadsheet or document, it doesn’t change and acts as a stake in the ground. At that particular point in time, that’s that decision you made. By keeping a digital record, you’re never quite sure if anything was modified since you last looked at it. Did your spouse make any modifications? Did you to into the file to play around with different scenarios? This is particularly a problem with keeping budget records which tend to always be in flux.

Of course if you have a good way of keeping digital records and tracking changes, go ahead and do so.

GTD principle: The power of the “next action”

Many people get stuck on projects because they simply don’t take time to determine the very next step. Instead, they get overwhelmed by the enormity of the task. Or worse, they simply don’t take the 30 seconds it requires to get enough clarity about what to do next, even if the task and project are relatively simple. By determining the very next step, you gain enormous clarity and momentum. You can clear the log jam and get a project moving again.

Personal finance principle: Focus on one financial goal at a time; your “next goal”

There is tremendous power in determining a list of your financial goals and attacking one at a time. It’s so easy to get overwhelmed with your finances trying to decide which of the many goals to go after. Instead of attacking them all at once, choose one at a time and focus only on that until it is accomplished. This applies more to short-term goals but can also apply to long-term goals.

Many people have heard about the debt snowball which happens to apply this very principle. Rather than trying to pay all of your debts down a little every month, choose one debt to pay down (the one with the lowest amount left to pay off) and focus all the money you can on just that debt while paying the minimum payment on the rest. Once the first debt is paid of, apply all the funds that were going toward that debt and add them to the next largest debt. As you pay off each debt, the total amount going towards the next debt continues to increase or “snowball” until all debts are paid. By following this principle you can pay off all of your debts much faster than if you simply paid a little extra to all your debts every month.

But don’t let it stop there. Once you pay off all your debts, take the total that was going toward paying them off (which could be quite a large chunk) and start putting the entire amount towards your next goal be it saving for a large purchase, a vacation, or your kids college education (notice how I put that third). Chances are with such a large focused amount you could achieve these secondary goals in a few months or less.

Of course, this principle doesn’t apply so much to retirement savings where the whole idea there is “slow and steady wins the race.” But for finite goals this focused approach works great. Speaking of which, you should already have a list of your goals, along with priorities, printed out and sitting in your financial binder, right?

GTD principle: Viewing all your projects in one place makes it easier to make priority decisions

One of the benefits of keeping a project list and reviewing it regularly is that it’s so much easier to make priority decisions when you can sit back and take a high-level view of all your projects. That way you can compare one against another. Some projects may seem incredibly vital when seen individually but, when compared to other projects, should take a back seat.

Personal finance principle: Keep a list of your financial goals and major purchases and make decisions based on the big picture

Having a trusted, complete financial system allows you to take a high-level view of all your goals and priorities and make the best trade-off decisions about where to spend your money. Sometimes I get fixated on buying a particular item and it seems like that’s the only thing I want. But when I take a step back and review my list of goals, I realize that there may be 2 or 3 things that I want even more but had forgotten about. I’m able to readjust and refocus my spending to maximum effect.

Even on a monthly level, this principle works. By switching to a cash-based budget, we saved a significant amount of money but perceived absolutely no decrease in our standard of living. That’s because we had been spending a lot of money (small amounts here and there that added up) on things that seemed alluring or attractive at the store but, once bought, went virtually unused. Sometimes these were small grocery items, and sometimes larger household items. Because we didn’t put a cap on our spending with clear cues when we reached the cap, we just relied on our impulses.

GTD principle: Operate from a zero base

David Allen mentions in his audio series “Getting Things Done FAST” (not currently in publication) that he operates from a zero base. Every day he completely empties and processes his in-boxes to “zero.” Doing so helps him maintain a squeaky clean system and make sure all open loops are dealt with.

He goes on to share a story of one executive he worked with that had a psychological resistance to getting his email to zero. He had processed everything up to that last email and then stopped. David had to coax and convince him until he finally succumbed and processed the last email, taking his email inbox to zero. Suddenly a light turned on in the executives mind as he experienced the freedom of a zero inbox.

I’ve personally experienced this release of a zero inbox. All of a sudden, you are no longer subject to constantly checking your email and being controlled by what others are sending you. When I get to zero I have the feeling of “wow, now I can do what I think is most important rather than what others think is most important.” It allows you to operate by your priorities rather than urgency. It inspires tremendous creative energy and freedom.

Personal finance principle: Use a zero-based budget and zero-based accounting

Zero-based budget

The obvious application in your finances is to operate on a zero-based budget. In other words, assign every dollar of income (your inbox) before you spend it. Ensure that there is no dollar without a “name.”

By operating on a zero base, something magical happens. Suddenly your finances become a finite thing. It’s surprising how many people never have this experience. They never are able to pin down their finances but rather feel out of control. Using a zero-based budget you have a sense of control and empowerment. The first time you operate on a zero base can be shocking. Sometimes you don’t see a pretty picture. But the good news is, by using a zero-based budget, least have control to fix your financial problems.

Operating on a zero base means operating within the bounds of the hard facts of your financial situation. You’re no longer dealing with rough or theoretical amounts but in hard income and expense figures. But even more important, it empowers you to take control of your finances and reach your financial goals. It allows you to make trade-off decisions based on your higher-level values.

Zero-based accounting

A second application to the concept of operating on a zero base is zero-based accounting. This concept may be a little confusing so stay with me. Zero-based accounting means that every dollar of income recorded in your financial management tool of choice (Quicken, MS Money, or a spreadsheet), must be allocated to a category bringing your “virtual balance” to zero. Conversely, every expense must be allocated or “come out” of one of your categories.

It’s like using virtual cash envelopes. With a completely cash-based budget, you would receive income (in cash) and divide the income up, putting the cash into envelopes with each envelope representing a category. When you spend funds, you must decide which envelope or category the funds come out of. Zero-based accounting is doing this exact thing, only instead of being cash, you’re tracking things virtually or electronically.

Another way to look at this is that the total sum of dollars in all your financial accounts minus the total funds that are allocated to categories (in a spreadsheet or other tracking tool) must equal zero.

Using zero-based accounting can be done fairly easily using spreadsheets or even in Quicken using the “savings goals” feature (I will go into much more details on this in a coming post). It’s a little more work as you go since every incoming and outgoing flow must be decided upon and allocated accordingly, but doing so allows you to see instantly your whole financial situation. It’s much easier to spot trouble areas (do you have enough saved for your next yearly insurance payment?) and track your progress towards your goals. If you’re not sure where to allocate funds, you can temporarily put it into a “decide” category and then address those funds at your next budgeting meeting.

GTD principle: Organize from the bottom up. You have to first know where you are to get to where you want to go.

The GTD system is a bottom-up approach. By getting control over the runway-level actions and projects you can then more easily and effectively achieve your higher-level goals and objectives. David Allen doesn’t say you can’t think about higher-level goals before you get your day-to-day operations under control. But it’s harder to achieve your high-level objectives if you can’t get a grip on your actual next steps.

Personal finance principle: Manage finances from the bottom up. Getting control over the details accelerates reaching your high-level goals

Managing your finances from the bottom up means getting total control of your month-to-month, “runway-level” spending and directing your money powerfully and effectively toward achieving your high-level goals.

I used to think that saving 10% for retirement was the ultimate in financial responsibility. I could spend how I wanted as long as I was saving for the high-level goal of retirement. Over time I’ve come to realize that by taking that approach I wasted thousands of dollars on frivolous spending that I really didn’t value as much as the other financial goals I neglected. By approaching finances from the bottom up I was able to still set aside some “fun” money while optimally directing other funds towards the goals I really care about.

Most people never get a clear picture of where they are financially on a nuts and bolts level. There’s always some element of mystery. By creating net worth statements and using a zero-based budget, you can get a solid grip on income and expenses to help you make solid decisions to meet your higher-level goals. Once you really see where you are, it makes it easier to get to where you want to be. Oftentimes it’s painful to see where you are but if you never do, you’ll end up arriving at an unwanted destination years down the road.

Posted in GTD, Personal Finance | 10 Comments »

10 Comments to “Applying GTD principles to your personal finances – Part 2”

  1. Dan Burke Says:

    Great article. Re: your recommendation to use a zero-based budget (“In other words, assign every dollar of income (your inbox) before you spend it.”), I’ve disciovered a great alternative to Quicken. Check out, a system that is predicated exactly on your point of assigning every dollar. It’s worked great for me. (BTW, I have no connection with the company; I just love the concept.) Please let me know your thoughts on this system.

  2. sjpeer Says:

    I’ve looked at mvelopes before and it does look like a great product. When I checked it out before, it didn’t function exactly the way I wanted (I’m very picky) and wasn’t customizable enough. I heard from a friend recently that they’ve made some significant improvements. I’ll have to check it out again.

    You’re right though, mvelopes does operate on this very principle which is why it’s so effective. Using this system “every dollar has a name.”

    Eventually I think we’ll see the point technology-wise where you can transact digitally and have really-time feedback as to how much money you have and what categories the dollars are in. I would like to be able to input at check-out which category the purchase is coming out of and get feedback as to the funds remaining in that category. With technologies like smart cards and using mobile phones, we aren’t too far off. That way you could have the convenience of electronic transactions while maintaining the advantage of real-time feedback that cash provides.

    One more technology that is intriguing is the ability to have a display on a credit card. You could do what I’ve described above, all on your credit or debit card.

  3. DA Stern Says:

    Re: “By keeping a digital record, you’re never quite sure if anything was modified since you last looked at it.”

    Saving a read-only (and date stamped) version of a budget or other financial worksheet will do… tho I prefer printing to a PDF.

    Btwn online banking/billing and my own data saved as PDFs, I’m clearing a few file drawers. Powerful desktop search tools make this more compelling than ever, esp. if you dread paper filing as much as I.

    Very interesting read… I also find great merit in the GTD techniques/mindset.

  4. sjpeer Says:

    That\’s a great idea to keep your finalized documents as pdfs. I\’m not sure why I hadn\’t thought of that myself. I\’m also a heavy user of desktop search (x1 is my favorite).

    I still find a lot of value keeping a hard copy. I tend to forget what\’s on my hard drive and it\’s a little easier to consistently review something that\’s printed out and kept in one physical location. Of course, for things that don\’t need to be regularly reviewed, digital is the way to go.

    If you have a digital system that works for you, I\’m all for it.

    P.S. For readers that don\’t know how to create pdfs, I recommend a free program called PDF Creator. To create a PDF file, you actually print the file and choose the PDF option in the printer drop-down menu. It will then ask you where to save the file. It\’s essentially printing to PDF.

  5. Dan Burke Says:

    Remember that, if you go the digital filing route, it’s critical that you back everything up religiously. Recognizing/admitting that I am not disciplined enough to manually back everything up to an external hard drive or disk, I’ve gone the online backup route instead. You just set your watch folders once and the system automatically and continually backs everything up (in the background while you do your other work) to a secure server off-site.

    My online backup choice is $55/year gets you unlimited backup of one PC. If my PC were to ever crash, I would just log-in to on my new machine to downloaded every file on the spot.

  6. frank mcpherson Says:

    Great articles!

    Your comment in the “next goal” section about paying down your debt by starting with the largest balance doesn’t completely make sense to me. I agree you should focus on a single priority item, but I think you’re better off paying down the item with the highest interest rate first. There may be some exceptions to this rule, for example your mortgage may have a higher interest rate than your car loan, but you may choose to pay off the car loan first because of the tax deduction you get from mortgage interest.

  7. Mark Shead Says:

    Good point on the paper records. I don’t think most people realize just how fragile cds, dvds and hard drives actually are.

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    […] The Getting Finances Done blog has two great posts on GTD + Personal Finance: Part 1, Part 2. […]

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