At the age of nine, my dad took me to see Jimmy Page and Robert Plant. Though the concert was 16 years ago, I still remember a few things.
I remember, telling friends I was going to go see two guys from Led Zeppelin live. Being nine years old at the time, I remember receiving blank stares from everyone at school besides my teacher, who didn’t believe me.
I remember, not understanding what an opening band was. The ticket said the concert started at 7:30, so I wanted Led Zeppelin to be on stage at 7:30. I couldn’t wait to hear my favorite song, “Whole Lotta Love”.
Last, I remember that the first song they played was, “When the Levee Breaks”. Out of all the songs they played, this is the only one I remember. Jimmy Page and Robert Plant didn’t get on stage until 9:30; 30 minutes passed my bed time. I was sleeping by the second song.
The Purpose of a Levee
Wikipedia defines a levee as an, “embankment, floodbank or stopbank is a natural or artificial slope or wall to regulate water levels. It is usually earthen and often parallel to the course of a river or the coast.”
The song, “Where the Levee Breaks” was first recorded in 1929, by Kansas Joe McCoy and Memphis Minnie. The lyrics of the original version, was recorded as a reaction to the great Mississippi Flood of 1927.
The purpose of this post isn’t to talk about levees. All this levee talk is because they’re a great analogy as to how most people go into debt.
The Expense Levee
When searching for an apartment with my then fiancée, two years ago, we set a budget of $1,000 a month. It was supposed to be a strict budget. One that we should not exceed. We had a wedding to pay for.
We ended up looking at around ten different apartments in that price range. We couldn’t see ourselves, living in any of them.
So we increased our budget by $100 a month. We looked at a few more, and immediately saw one we liked and moved in.
I don’t remember the exact numbers, but even though we decided to spend 40% of our income on rent payments, we were spending 45%.
One Small Flood
In the grand scheme of things, the $100 a month didn’t cause us to go into debt.
Getting back to the levee analogy, spending a $100 over a month on rent for us, was like a small flood caused by a tropical storm. Some minor damage, but nothing compared to what would happen if a hurricane hit and the levees broke.
How the Levees Break
The most recent example of a levee breaking is Hurricane Katrina. If I remember correctly, days before Hurricane Katrina there were a few tropical storms.
Each of those tropical storms is just like going a bit over budget in one area of your finances. Say you went 5% over on your apartment purchase. A few months later, when it’s time to buy a new car; you again stretch your budget , going 3% over budget.
A few months go by and you’re buying a new TV. There are a few nice ones in your price range, but the one you really want, the one with the built Blu-ray player, is about $200 over budget. Again, you decide to stretch a little bit beyond your budget, and get the nice TV.
Now, after a couple of major purchases, just barely over budget, the water is getting higher. The levees are 98% (equivalent to spending 98% of your income) to capacity. They are holding but barely.
Levees are not meant to be 98% capacity after routine storms. They are meant to be at 98% after the biggest of biggest storms hit.
In the case of New Orleans, it was Hurricane Katrina that flooded the levees. In personal finance, the levees break from surprise medical bills, job losses, car accidents, etc…
Setting Limits to Avoid Debt
Setting and sticking to limits, is important not just on large purchases but smaller ones. Our self-discipline is just like a muscle. It can be trained to grow.
Going just $5 on a limit my wife and I set for ourselves for the holidays, is just as bad to my long-term financial health as going 5% over on our apartment purchase.
Setting and sticking to limits is a habit. Once you do it a few times, it’s as easy as brushing your teeth.
Beyond setting limits, it’s also important to have an emergency fund. But you knew that already, right?