“A heuristic technique, or a heuristic, is any approach to problem solving or self-discovery that employs a practical method that is not guaranteed to be optimal, or perfect, but is nevertheless sufficient for reaching an immediate, short-term goal or approximation. Where finding an optimal solution is impossible or impractical, heuristic methods can be used to speed up the process of finding a satisfactory solution. Heuristics can be mental shortcuts that ease the cognitive load of making a decision.” -Wikipedia
What I have come to understand recently is that I have a heuristic approach to many areas of life: an approach that is not perfect, but nevertheless gets you where you need to be. For example, I don’t follow a strict fitness routine – but am able to stay strong and fit by understanding progressive overload and basic programming; or, when it comes to nutrition, I don’t follow any strict diet – but avoiding processed foods and over-eating helps maintain homeostasis for my composition.
I find the heuristic approach to be very low-stress, which makes it easy to stick to and be consistent with.
This can also be applied to money management: simple, effective, not perfect – but will get you where you need to be in the long run.
Before applying the heuristic approach you need to do two things:
- Track your spending for 1 month. This will allow you to get an understanding of your outflow. It is easy to track if you use your credit card, and extra easy if you hook it up to an app like mint.
- Build a cash reserve that can cover 6 months of your spending. For me, I’ve found 6 months to be enough to make me feel comfortable – some people do 3, others 12.
My Approach: every time I get paid I follow these steps:
- Review my spending over the previous week. Paying attention to trends, and frivolous spending I can cut out so I can keep your operating expenses low.
- A more long-term approach will focus on cutting cost in the big 3 areas: housing, transportation, and food. On the week-to-week basis it is important to understand where your money is going: then you can bypass hedonic purchases, cut groceries, and anything else that can be done in the near term.
- Review upcoming bills, and make sure I have cash set aside to account for them. I like to keep enough in checking for upcoming bills + some extra in case there are any bills I have forgotten about.
- Pay my credit card balance. (Treating my credit card like a debit card and never spending more than I have.)
- Invest what is left; following the strategy from the simple path to wealth, playing the long game with compounding interest, and staying the course even in a downturn.
The beauty in this approach is that it reduces the amount of decisions you have to make. You simply pay your bills, make sure you have some cash, and invest the difference.
I’ve been applying this simple heuristic approach every 2 Fridays for the last 5 years; and while it seems insignificant each individual Friday it has powerful implications in the long run. Consistency and persistence really is a super power.
I hope you find this useful.