We make chicken parm fairly regularly. It's a simple recipe. Bread some chicken breast, cook it, top with tomato sauce and mozzarella, warm it up the melt the cheese, and then serve over pasta.
But if you looked at the first time we made it and the latest time, the two looked massively different.
We've gotten more competent at the cooking process but we've also improved our process every time we make it.
The latest “innovation” was to forgo frying the chicken after it was breaded. Until recently, we used to fry the breaded chicken and then bake it. The most recent time, we skipped frying entirely. The frying process is really messy (oily, smoky) and you never really kept much of the crunch after you baked it. All of the oil, none of the crunchy payoff. So we just baked it and it turned out great.
We can apply this approach to many aspects of our lives. To you, baking chicken parm may seem obvious but up until recently, it wasn't to us.
But the point isn't so much how quickly we arrive at a solution but that we are constantly seeking a better one.
We do the thing and think about how we do the thing. And then we think about it some more.
If we make incremental improvements, the cumulative effect is enormous.
So how do we apply this to our daily lives to improve our thinking?
Seek to Improve Every Day: Kaizen Effect
Everyone wants to win the lottery because who doesn't want instant wealth. But the key to wealth is saving often, investing wisely, and waiting for compound interest to work its magic.
The Kaizen Effect is the idea that continuous improvement in your process will eventually yield massive gains. It's most notably associated with Toyota and The Toyota Way (or more generically, “lean manufacturing”) but it can apply anywhere.
You don't need massive singular improvements to effect positive change. You don't need to win the lottery, you just need to make sure you're saving money on a regular basis and investing it in the right places. You need to make sure you're increasing those savings when appropriate and be patient.
Your 401(k) doesn't need a $5,000 influx – it just needs your regular contributions every pay period. Increased when your budget can handle it. Repeat.
Simple Is Elegant
Many things in our lives are too complicated.
Sometimes it's because they are complicated. Sometimes it's because we feel that we need to make it complicated because that somehow makes it better.
But there's an idea we can steal from computer science and programming that is very appropriate – there's elegance in simplicity.
And we should embrace elegance rather than celebrate complexity.
It's tempting to open a new bank account to earn a little extra interest. At the time of this writing, my Ally Bank savings account is paying 2.20% APY on the savings account. CIT Bank offers 2.45% APY – a 0.25% difference.
CIT Bank is paying 10% more in interest!
But 0.25% APY on $100 is only twenty-five cents a year. While I'm not one to scoff at a quarter on the ground, it's not worth opening a new account, transferring money, and adding complexity to my life over it. If I were opening my first account, perhaps I'd give CIT Bank a look over Ally Bank but interest would only be one factor I'd consider.
All things being equal, err on the side of simple. (read this if you need help simplifying your finances)
Update Your Mental Models
As we think about the things we do and how we do it, we build models in our head for understanding it.
When I first discovered the stock market, my model was very basic. People bought and sold shares of public companies in a marketplace. These companies were valued based on their earnings, their growth potential, the mood of the market, the future prospects of the economy, and a collection of other “metrics” that you put into a blender and out came the price. To make money in the stock market, you had to buy low and sell high. Rinse and repeat and prosperity is on the other side.
As I got older, and spent more time reading and learning about investing as well as actually investing, I realized that because of inflation there's a natural bias for nominal stock prices to go higher. Since the companies were selling products and the products were increasing in price due to inflation, the stock price would reflect this and capture some of this inflation.
I also learned that by owning a variety of companies, such as in a fund, I could diversify much of my risk and, given a long enough time horizon, win out as long as I could stick to that long time horizon. I didn't have to buy and sell often to make money in the stock market. I just had to buy and wait.
My model of the stock market and investing will continue to evolve but it's already come a long way from how I thought about it in the first place.
When you first learn about anything, your model will be basic. It will capture the broad strokes and leave the details a little hazy – that's OK.
As you learn more, you can start to fill in the details, update the broad strokes, and improve your understanding of that model.
Remember There Are No Perfect Solutions
Personal finance is a lot like parenting – there are no perfect solutions.
What works for one child may not work for another. What works for your oldest may not work for your second. Parents of multiple kids know this because they've lived it.
This applies to nearly everything in life. What works for someone else may not work for you but it's important to study what works elsewhere to see if you can integrate a version of it in your life.
You can find a perfect example when you think about investing. Some investors want dividends. Some investors want the company to keep and invest that cash in the business to grow the value of the company (and also avoid the tax on those dividends).
If you have a stable corporate job, then you're likely in the second camp. If you're an entrepreneur or have irregular income, the cash flow from dividends provides a nice buffer if you experience a leaner than expected pay period. That's just one scenario.
Neither is “right” in all situations but it's important to understand why.
Take those same two people and look at mortgages. Adjustable rate mortgages were borne out of a need. It seems crazy for someone to sign up for a 5/1 ARM (fixed rate for five years, then floats every year thereafter) because of how unpredictable rates are. But let's say you're in sales and your income is irregular, the 5/1 ARM has a lower monthly payment. In the months where you earn less, you pay the minimum. In the months you earn more, you can pay down the mortgage faster.
The corporate employee happily signs up for the 30-year fixed mortgage with a slightly higher monthly payment but locks in that rate for 30 years.
(You could argue that the irregular income individual should just buy less house, but that's an entirely different discussion.)
Continue to learn and study from others, avoid dismissing any ideas out of hand, and consider how it might work in your situation (or not).
Which lends itself to the next tip…
Test Your Theories
It's a well-understood idea that many tech startups should get to market as quickly as possible with a minimum viable product and then innovate from there.
If it works for future billion dollar companies, why not for me?
I am constantly moving things around and see how I think about it. It's something as simple as moving things in the drawers of our kitchen. We started with our utensil in one drawer and, years later, we've since moved them to another, more useful, drawer.
In my first ever financial network map, the hub was a Bank of America account. I wasn't sure about using an online bank because what if I needed a brick and mortar bank? Could I really have an online bank, Ally Bank, be my hub?
So I tested it. I moved everything so Ally Bank was my hub and kept my Bank of America account “just in case.” If I really needed it, I could still use it… but I'd have a new, better, hub.
You can guess what happened – I didn't need it. I tested my theory, it worked out, and now I have a hub where I earn far more interest and have better account features. The only time I go to a Bank of America branch is to get cash from the ATM and I can do that with their card or an Ally bank card (they reimburse up to $10 in ATM fees each statement).
You don't want to test every theory. And you may not even want to test it in a live situation (i.e. don't sign up for an ARM “just to see” if it'll work!). But if something appears to work on paper, give it a whirl in real life.
Take Advantage of Technology
I used to get my credit card statements and scan them each time for any irregularities. Sometimes I'd see a charge I didn't recognize, ask my wife, and she wouldn't remember it because it made it three weeks ago. I'd get all huffy, I mean it was just three weeks, and then do more research and realize I made the charge. She didn't remember it because she literally had no memory of it.
Then credit cards started offering transaction notifications. Now, I get transaction notifications for any charge over $0 (or $1, depending on the issuer).
Does it sound excessive? A little… until I realized how few transactions I made (which is a good thing!) and how easy it was to review a transaction if you get it immediately after making it. No need to review statements at the end of the month and we've caught instances of fraud and error (which happens more often than fraud) in near real time.
(If you try this, you'll be shocked at how fast it is. I've gotten notifications about a restaurant charge before the server came back with the bill for me to sign.)
Sometimes technology can make things more complicated, which is bad.
Sometimes technology can make your life so so so much easier, which is good.
If you aren't using a personal finance tool to help you manage things like your budget or your investing, you should give them a look to see if they can help.
Embrace the Evolution
Remember to embrace and enjoy the evolutionary process.
It should be fun and not feel like you're trying to squeeze blood out of a stone.
Ultimately, process improvement is about life improvement. You want to make your life easier to live. You want your processes to work for you, not the other way around. Eventually, you will reach the point where you're pretty happy. Improvement becomes less of an active pursuit and more of a passive one (“oh, look, I can try that instead.”).
Finally, there is a law of diminishing returns whenever you deal with anything. Sometimes what you're doing is optimal. Or optimal for now.
That's when you should move onto parts of your life and see if there are places you can improve.
Money is important but it's not all important.
How do you think about improving your processes, personal finance or otherwise?