The myth of the $600 hammer vs. the Data Driven Life

The myth of the $600 hammer (12/7/98) -- www.GovernmentExecutive.com: "Bookkeeping based on congressional appropriations makes such cost-finding immensely difficult. Functions that in practice are inextricably intertwined are often paid for by totally separate line items in the budget. New weapons are bought with one 'color of money,' existing weapons are maintained with another, and the personnel who operate them are paid with a third. In fact, to save administrative costs, military salaries and pensions are all paid from one central office. As a result, said Eckhardt, among commanders 'there's a tendency to view military labor as free, because you're not making any expenditures from your installation [budget] to pay those people.'"

This is a fascinating article that, IMHO, should be required reading for every voter and taxpayer in the country.

In my household, we live the data-driven life. Our budget is updated to reflect actual fluctuations in income as well as risks to income. Our retirement plan includes a spreadsheet tab showing our assets and future income, with risk level specified (our home equity, for example, for a house east of Sacramento, is subject to employment trends at the major local employers, including the State of California). We break our budget down into monthly figures for both monthly costs and intermittent costs. For example, although we don't have a car payment, we have a monthly budget item for a car "payment" (the cost of our average car, divided by 5 years, because we typically replace one car every 10 years, and we have two cars). We budget for vacations and gifts and replacing the computer every few years and redecorating periodically.

The idea behind our budget is to 1) recognize the true costs of a daily latte or a Christmas splurge and 2) ensure that we set aside enough money for our day-to-day expenses as well as our year-to-year expenses. Most of our savings - in retirement accounts and taxable accounts - is earmarked for retirement and we hate to take money out of retirement for current expenses. It is, perhaps, an odd habit to try to account for both daily expenses and once-a-decade expenses in our monthly budget, but it encourages us to be honest about our expenses.

Let me give you an example. When we buy groceries, we multiply the per-meal cost by 30 to determine where it fits in our budget. If the meal cost is so low that eating it everyday would put us under-budget, that's a meal we can eat as often as preference and health considerations allow. For instance, $5 meal, if we ate it every day, would put our monthly dinner budget at $150, which is affordable. On the other hand, we make some recipes that use multiple fresh herbs. At $2 per herb, plus a pricey cut of meat and out-of-season vegetables, we have accidentally spent as much as $25 on a good, but unexceptional, meal. If we ate like that every day, our dinner budget would be $750, which strikes us as unreasonable. That's not to say that a $25 meal is out of the question - it's still cheaper than going out to eat, so it's a good value if it is at least as enjoyable as going out to eat. Our local restaurants don't use particularly fresh ingredients or especially creative recipes, so cooking something special at home is often more enjoyable for us than dining out. Expensive meals are relegated to occasional treats, not cut out altogether.

On the other hand, I agonized over replacing my laptop computer. I could get a fast, powerful computer for about $1,000, or I could get a functional computer that is much faster than my current computer, for around $500. That's a lot of extra money to spend. (In fact, I am still on the fence and holding out for prices to drop.) But we realized that we hadn't budgeted for computer replacement, so we added it to the budget. We replace the computer about every 3 years, so a $1,000 computer works out to about $30 a month. In other words, I should agonize over the $4 daily latte ($120/month or $4,300 over 3 years) and just go ahead and buy the better laptop computer.

See, without data, the latte seems like "it's only $4" and the computer - which is more useful and valuable - seems like a lot of money. Data is powerful stuff, useful stuff, and if it helps me spend money smarter and save money more often, imagine what it would do for the government?!