Artificial Scarcity

Abundance Versus Scarcity

One of the traits of generous people is an abundance mindset. You’ve probably had a boss that happily gave you as much of her time as she could to make you better. She likely felt as though building leaders around her was the best way for her to seek personal fulfillment. Such an ethos usually comes from a mindset that there’s always enough to go around whether it’s money or time or talent. An abundance mindset knows that there’s not a fixed size to the pie. The pie can always grow. 

You’ve probably also met people who keep a tight fist around every resource they can. Maybe it was that friend in college that always mooched beer and pizza even though they had money. You probably have someone in your squadron that thinks that the only way to get ahead is to keep others behind. A scarcity mindset usually comes from a belief that there’s just only so much to go around and it’s a zero-sum game. I win, you lose. Full stop. 

If you believe in a culture of servant leadership, the abundance mindset is the clear winner. Is there utility to a scarcity mindset?

The Origins of Scarcity

The most dreaded word in all of personal finance is the B word. Budget. Only a select group of financial weirdos like budgeting. Full disclosure: I am one of those weirdos. 

To most people, budgeting feels like a strait jacket. It feels like what poor people must do because they don’t have enough. It is certainly what my parents did to stretch their dollars as far as possible. While I certainly didn’t think my family was poor, we weren’t Ballers and let’s just say it wasn’t because Ballers hadn’t been invented in the early 1980s…

The reality is that my parents did budget, and fiercely. Failure to do so meant failure to take care of the family. The first two lines in their budget were retirement saving and giving to their church. 

I don’t have copies of their old budgets, but it’s a reasonable guess that they gave 10% to the church and saved 10%. That meant that the family needed to accomplish all other missions on 80% of my dad’s paycheck. If there was a level of scarcity at the 80% threshold, it came from a choice. They created scarcity. They manufactured it. It was artificial. 

It’s not much more than a blinding flash of the obvious to suggest that we should save for our future. Americans are fussy enough about paying for their own Social Security and healthcare, they sure don’t want to pay for any extra living expenses for their neighbors. We have to save for that stuff ourselves. 

But this effort of socking money away, saving for the future, paying ourselves first, it does create a level of scarcity. There are fewer dollars for current spending, whether we saved some of them or gave some of them away. 

Since you can’t spend in the red indefinitely (unless you’re the United States Government), scarcity ultimately forces economy. It forces some level or method of budgeting. 

This is what it boils down to, “I’ve got this much month. And I’ve got these many dollars.” When that’s the equation, we learn to live on the dollars that are available. 

The Benefits of Scarcity

Scarcity forces those without adequate resources to develop spending plans to make their money last. While many of us say, “I’ll start saving for retirement when I earn a little more,” the reality is we probably won’t.  We save for retirement and other goals when they’re important to us and we’re willing to live on what’s left over. 

You’re reading a personal finance blog, so chances are you skew more towards wanting to save than the average steely-eyed killer, but do you embrace scarcity or fear it?

When we devote the first dollars into our coffers to the most important missions such as giving, saving, or paying down debt we commit to surviving and hopefully thriving on the rest. The more we can realize that we thrive on a bit less, the more we can accomplish our goals by creating artificial scarcity.

When we save for retirement and other goals first, we’re intentionally embracing scarcity. We could pause or pull from savings if we need to, but we typically do not. Generally, once we start to see compounding returns in our accounts, we prefer to let that magic continue and just deal with any temporary scarcity another way.

Scarcity is a tool to be embraced. By imposing limits on our spending, we curate our future and present. We design a future that can have abundance and a present that acknowledges “what we have is enough.” 

The Tactics of Scarcity

Whether we impose scarcity, or it’s imposed upon our monthly finances, we need tactics to manage it.  Enter the dreaded B-word again.

Budgeting is not a unitary act of spreadsheets, tears, and curse words. It’s a spectrum of tools.  Just as you wouldn’t use a GBU-24 to shoot down a MiG, you probably wouldn’t need to use a zero-based budget when you’re financially independent. 

Tactic 1: Every Dollar Gets a Mission

The most stringent form of budgeting is the Davey Ramsey method. This is a great tool for those with zero wiggle room in monthly finances, those trying to understand where their spending might be leaking, young people just starting out who’ve never paid attention to money, and those who have too much money and time on their hands and just like this stuff.

Sometimes called zero-based budgeting, the idea is to prioritize spending and allocate every dollar that will flow through the household in a tool such as a spreadsheet or even piece of paper until there are no untasked dollars. If there’s no leftover money, then there should be no leakage or fluff. 

This method of budgeting is tedious and must be performed each month to really tame out-of-control spending. It also requires active monitoring throughout the month to make sure that dollars are conducting their missions and not diverting.

While some love this level of budgeting, it’s just not going to work for many busy families. 

Tactic 2: The No-Budget Budget

A common budgeting method for those without the time or inclination to split the atom on monthly spending is a no-budget budget. The idea is simple: 

  1. Pay yourself first with automated transfers to retirement savings.
  2. Automate all recurring bills such as the mortgage or electric bill.
  3. Spend normally with the rest of the money.

That’s it. No spreadsheets, wailing, or gnashing of teeth. But… step 3 can be tricky. If spending normally means carrying a balance on a credit card, this is not the method for you! If spending normally means your checking account bottoms out at about the same number every month, you’re on track.

This method works for families that don’t tend to deviate in their monthly spending by much. Keeping a floor of say, $1,000 in the primary checking account allows you to “monitor altitude” by seeing how close you come to the floor each month before the paycheck hits again. 

Many families find that keeping a low floor, e.g., $1,000 rather than a high floor, e.g., $20,000 also helps nudge spending. We don’t mind dipping below a $20,000 floor, but a $1,000 floor requires close attention to avoid an overdraft. 

Tactic 3: The Electronic Envelope Budget

A modification of the No-Budget Budget, the Electronic Envelope Budget acknowledges that not every month looks the same. Some spending is lumpy throughout the year, but the income is pretty smooth over the months. 

This method involves:

  1. Pay yourself first with automated transfers to retirement savings.
  2. Set aside 1/12th of annual spending in “lumpy” categories in an “electronic envelope” each month.
  3. Automate all recurring bills such as the mortgage or electric bill.
  4. Spend normally with the rest of the money.
  5. Transfer money from the electronic envelope when a lumpy category spending event comes up.

Electronic envelopes usually take the form of spare checking or savings accounts that you just stash money in. Bank apps make it easy to move money so these accounts don’t really need a debit card or additional set of checks. Electronic envelopes allow you to tell your money to hold at the IP awaiting tasking.

Lumpy spending categories are different for every family but often include categories such as gifts, travel, repair, veterinary bills, and medical bills. 

The electronic envelope budget can be a goldilocks method for some families. It gives dollars a mission, allows spending without micromanagement, and creates the ability to move money between envelopes when we’re inevitably inaccurate with estimates of spending in one category or another. 

There are endless variations of budgeting tactics but they’re likely a close cousin of one of these methods. All of them recognize and use scarcity. The more scarcity we impose by paying ourselves first, the more we can save for our future. 

Cleared to Rejoin

Self-imposed scarcity today creates the abundance we want tomorrow. The key to using artificial scarcity is to embrace a tactic that works for your family. Nanoparticle-level budgeting works for some and the big picture works for others. Spending it all today works for none. 

Fight’s On!

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