Tuesday, February 24, 2015

Know Your Financial Baseline

In tennis the baseline is the edge of the court. Being aware of the limitation of the playing area is a skill that for a seasoned tennis player will become a natural instinct. They will know how to hit the ball to keep it in play and also they will 'feel' when they have hit it out of play.

This visceral knowing comes from the practice of the sport: a concerted effort towards perfecting your craft as a tennis player comes not only from keeping your body in tip-top shape but also from mastering the court.

In the same way, mastering your finances not only requires mastering the generation of income but also in being fully cognisant of the way in which that money is spent. The spending of money in this scenario is the tennis court. To continue this scenario, a financial baseline is the least amount of money you need to furnish your needs on a monthly basis.

This number represents what you would keep paying if you found yourself in a reduced income situation and needed to drastically cut expenses. This number is derived by looking at your current list of obligations and highlighting which bills and activities you would maintain even if you found yourself in the worse case scenario.

For a starter a baseline would include housing and the associated utilities, food, transportation and a cell phone or the internet for communication. Maintaining other things such as health and life insurance would be additional on top of this. If possible making minimum payments on debt would also be considered part of your baseline costs, as you would want to do whatever possible to stop those obligations from going into collections. 

Knowing your baseline helps you to make gauge your how much risk you can tolerate when making investments. It also helps you to plan for retirement, as you would have a good idea of how much money you would need to comfortably maintain your current life style. 

It is also key when looking at how much of your income you are utilizing. This percentage ideally would be low enough that you can comfortably meet your living needs and still have plenty left over for your wants and to put into savings, investments and retirement vehicles.

Even if your financial situation is not ideal and knowing this information can assist you to avoid taking on any-more than you can handle. It can also pave the way to turning around your current situation; awareness is the first step in implementing lasting change.

Our consumerist society driven by mass media marketing encourages the individual to get whatever they want immediately and promises that the problems that they are facing (depression, low self-esteem etc) will be solved by purchasing the items being advertised. These false promises often lead people into living a lifestyle which is propped up by debt. Knowing your baseline is your first protection against such a trap, as you become acutely aware of your own financial situation and how such purchases will effect your ability to maintain a healthy balance.

The key to a life free of money worries to keep your ball active at all times, even if you chose to sometimes take a risky shot, you do so knowing how you will recover from any potential double faults. 

Too many people try to constantly increase their income without learning to master the court; which is akin to a tennis player spending a lot of time in gym but not enough time actually playing. While the tennis player is stronger and can now hit the ball farther, their skill in playing the game has only marginally improved.

In finances this type of thinking leads to dead-end as one begin to realise the truth in the adage more money, more problems or succinctly: the more you earn, the more you spend. In order to keep yourself from falling into this trap one must keep your baseline from exploding as your income increases, and when your income decreases, drop your baseline accordingly so that you always maintain a level of breathing room. 

To  put it in a different way, you can win at the game of personal finance by keeping your ball well within the confines of the tennis court. Overtime as you practice it will become second nature and you begin enjoy the victories that will ensue as you master the ratio between your income and your obligations. You will then be able to fully enjoy the abundance that you have left over after your have satisfied the balance between the two.

Game. Set. Match.
Raphael Nadal


  1. The baseline is only the extreme ends of the court. The other lines are the sidelines. But the analogy still works, if you're talking zero base budgeting.

    1. Thanks for the heads-up, I was really only thinking of the extreme ends so I am glad it still works out. :)