Managing a long list of monthly bills can be overwhelming, but not all bills are created equal. I searched for ways to organize your finances and finally decided to make one up for myself. It’s logical, easy to track, and pretty. I call it The Traffic Light Finance Model. It started out as a budgeting “trick” to help me organizing my personal finances and slowly grew into more pervasive life philosophy.
Organize Your Finances Using Traffic Light Finance Model
Before we get into the easy-to-use technique to help organize your finances, let’s make sure you have a thorough understanding of the good-old fashioned, traffic light. Per the California Driver Handbook red means stop, yellow means caution, and green means go. But you know this, right? Cool. Let’s move on.
Despite how busy of a day you are having, you have to stop at a red light and wait patiently. You quite literally can’t move forward until the signal changes and you are permitted to move forward. To me, this sounds a lot like my debt. Red light finances keep you from moving forward. These includes tax debt, credit card debt, personal loans, car loans, student loans, business loans, etc. They are expenses from the past that are hanging you up and preventing further progress.
For a yellow light, drivers need to slow down and actively check your surroundings. You decide based on the situation whether you can “make it” through or need to slow down and stop. Yellow light finances are your current, every day living expenses. These are your rent, cable, phone, utilities, food, entertainment, spending cash, discretionary funds, etc.
Green means go. Green light finances are those that propel you forward, into your future. These are your savings accounts, retirement, HSAs, life insurance policies, investments, college savings, travel funds, holiday accounts, mortgage, IRAs, car insurance, health insurance, and of course, your income. If it protects or provides for your future, it’s a green finance.
Now that you have the basic concept, bring the Traffic Light Finance Model to life by color-coding your monthly budget spreadsheet. You don’t need to re-create it, just code the category with its corresponding color.
Here’s a sample from mine.
From here, you can choose whether to restructure your spreadsheet around this new classification system or not. That’s up to you. But the point is that at a quick glance, you can see how many of your bills are either paying off the past, helping you live your present life, or planning for your future.
If you are truly ambitious you can do the actual calculations. This could become a nice tracking metric for you to record your progress during your journey to improve your financial health. For example, I’m trying like hell to get my “red” under 20%.
Now, I have no hard and fast theory on what the ideal balance is for this Traffic Light Finance Model. Intuitively, I’m thinking that there should be at least at much (if not more) green than yellow. Make sure you are not sacrificing too much of your monthly allowance to the future because, in my opinion, a profitable life means both now AND the future.
However, I think we can all agree that too much red just holds you back. Use whatever debt reduction strategy that works for you to get “red out of your ledger.” (Bonus points for those who get the movie reference.)
If anyone out there has suggestions for an ideal equation for my Traffic Light Finance Model, I welcome them!
A Guiding Light to Purchase Decisions
Now that you have the basic concepts of the Traffic Light Finance model, you can use it to organize your finances in places outside your budgeting spreadsheet. I use it everyday when I’m at the store or considering a purchase. For example, I’m far more apt to purchase something that falls into a green category. “Green” purchases could be to enhance your business or help you make money in the future. I justified a monthly membership to the local car wash because I hope to be driving for Uber soon. The new software to help me with this blog was OK, too. The wine glasses for myself are definitely yellow. However, I did decide to finally color the new desk I wanted red because my current desk is fine. I would have become a debt I didn’t need and an item that wouldn’t last past my next move.
Utilizing the Model In Your Profitable Life
Once you have practiced with this technique, you might find yourself categorizing many things according to the red, yellow, green light philosophy. For example, I’ve had a project that I’ve been procrastinating on. I want to create scrapbooks from the reams of memorabilia I’ve saved in a big suitcase. The task is daunting, hence, the procrastination. However, since I switched to thinking of it as “green”, it seems like a more worthwhile endeavor that will positively impact my future. Maybe you even starting “coloring” your friendships, too. Just a thought.
What do you think? Any value in color coding your finances? What techniques do you use to have organize your finances? Are you willing to give The Lady’s Traffic Light Finance model a shot?