Debt is an issue facing millions of people in the United States. It can drag people down both financially and emotionally.
The amount of debt has grown again in the past few years. The average American household has almost $17,000 in credit card debt alone, according to a 2016 study by Nerd Wallet.
Big debt leads to financial problems that can quickly snowball. For example, those with high debt have higher interest payments. It also may prevent you from having the money to get the best deals on home mortgages and car loans.
Financial stress can also lead to mental health issues. A 2015 study published in the Journal of Family and Economic Issues found higher rates of depression among those with short-term debt such as credit cards, especially among unmarried people and those without a college degree. Longer term debt, such as for a home or a car, did not have the same link with feelings of depression.
Digging out of a financial hole – or trying not to get yourself stuck in one – can benefit people in many ways. The methodologies in Lean Six Sigma can actually help people accomplish this by setting aside emotions and providing tools to allow for a rigorous, honest and thorough examination of personal finances.
Developing a Budget
Six Sigma helps to find defects in a process and correct them. Lean focuses on eliminating waste and unnecessary steps in a process. Together, they can help address issues involving finances.
One place to start is with Lean’s Value Stream Mapping tool. In business, a Value Stream Map involves the visual evaluation of an entire process. It is used to identify the eight areas of waste (defects, overproduction, waiting, non-value-added processing, transportation, inventory, motion and unused employee talent).
In relation to home finances, a first good step is to evaluate how much money is coming in and where it is being spent. This type of rigorous evaluation of finances can lead to development of a monthly budget, which is key to getting your finances under control.
Identifying how much money is coming in is the easy part of the process. The difficult part is determining where your money is being spent.
Treat this as a process and apply Value Stream Mapping, determining where money is being wasted. Perhaps you pay for lots of memberships or subscriptions. Or maybe you buy a certain product once a week, but often find yourself using it sparingly.
Finding wasteful money spending can prove difficult because you are looking at your own behavior. That’s why Lean Six Sigma can help – it takes emotion out of the process.
Take a hard look at your process for handling money each month. Chances are, you might see yourself in these common issues.
These are some common issues that can cause people to overspend. Make identifying these triggers a priority.
- Stress – People feeling stressed often make themselves feel better by buying something – sometimes things they can’t afford.
- Emotional events – Break ups, divorce, death of a relative or a friend – these can lead to feeling depressed. It also makes the quick “pick me up” feeling of buying something very tempting.
- Peer pressure – If you have friends who spend beyond their means, chances are you will also spend beyond your means.
- The holidays – It’s important to set a reasonable budget for the holidays and stick to it – especially in the face of immense advertising pressure to buy. This is even more of an issue with people who like to please others with expensive gifts.
- Immediate gratification – You walk in, you buy something, you feel better with the new item. Until the credit card bill arrives, and you can’t immediately pay it off.
- Spending all you have – People who get promotions or come into money in some other way often will increase their spending habits to this new income level. There’s no reason to change a lifestyle you enjoy even if you make more money.
There are deeper issues as well, such as low self-esteem that can be bolstered by buying expensive items.
The bottom line is this: Think like a businessperson. Use Lean Six Sigma to thoroughly examine your behavior and eliminate wasteful spending.
Useful Lean Six Sigma Tools
Here are a few other Lean methodology tools that, with slight modifications, may help you manage your spending.
This philosophy actually focuses on making workspaces orderly and clean, then setting up standard practices to sustain a higher level of organization. The “5S” are Sort, Set in Order, Shine, Standardize and Sustain.
This same practice can apply to money. For example, the third phase of 5S focuses on Shine, a step meant to clean up the clutter and organize. But rather than cleaning a work station, you are looking to clean up your personal finances. Consider identifying all the things you purchase and don’t use. Do you spend $100 a week on groceries but end up frequently throwing away food that has gone bad?
The emphasis of using 5S is creating new standards – in this case, standards for budgeting and managing money – that become routine and allow you to sustain success.
Kaizen, which comes from the Japanese word for “improvement,” is another Lean tool worthy of consideration for those looking to better manage personal finances. This also requires a thorough examination of a process. In this case, it’s where your money is being spent, but it puts a focus on small, continuous changes that over time, can have a huge impact.
With Kaizen in mind, you don’t have to fix personal finances in one month. That will lead only to frustration. However, small steps can quickly add up. Examples can include cutting out expensive restaurants, lowering or eliminating your cable bill, spending less on entertainment, or setting a monthly allowance of cash and removing the debit and credit cards from your wallet.
This is the main strategic tool in Six Sigma for optimizing existing processes. Again, it can be applied to personal finances. The acronym stands for: define, measure, analyze, improve and control.
In a personal finance context, it could work this way.
Define – You define the areas where there is a “defect” in your spending and set a new goal to improve. You are spending $200 a month on pizza, drinks and going out to eat with your family and friends. The new goal is to instead save that money to pay off a credit card.
Measure – You collect data on the defect and measure its impact (in this case, $2,400 per year). A further impact is that it’s delaying paying off your card, which is costing you in interest payments each month.
Analysis – Here, you look at the data and try to find root causes. Why are you spending so much on entertainment? Are you too lazy to cook instead of ordering a pizza? Are you going out with friends who overspend often, one of the common triggers listed above? Here’s where you want to get down to the root of the problem and develop a plan to solve it.
Improve – In this phase, you begin to put a plan into action. Cut the spending each month by a certain percentage, for example. Find some friends who prefer staying in rather than going out all the time. Remember the lesson found in Kaizen – small changes, big impact.
Control – Make your plan a routine part of a monthly financial budget. Measure the impact of the changes and make sure it’s working, and continue to look for improvement opportunities.
Principles of Lean and Six Sigma can be applied to just about everything, even quitting smoking. Becoming debt-free and managing your finances is possible, but, with any process improvement project, you need to focus on using the right tools, and being very honest with yourself.