We’ve all heard the phrase “Living beyond your means”. It describes someone who is living beyond their financial resources. Interestingly, there are other definitions of the word “mean”. One in particular can also be used here; the mathematical definition. This definition defines “The average value of a set of numbers”. It’s a statistical term: to find the “mean” or the “average”.

So let’s rephrase the above question in the mathmatical context: “Are you living beyond your mean?” Are you living beyond your “average”? Your average what? Your average income. More precisely; week-to-week and month-to-month, are you living beyond your average weekly income each week, or your average monthly income each month?

If you don't know what your average monthly income is, then you should, especially for those of you with highly variable income. Because knowing your “mean” income, and measuring it against your "mean" spending, is an uncomplicated and extremely precise gauge of whether you’re slowly creeping into debt – or not.

To find your monthly mean, take your total bring-home annual income for the last 12 months and divide by 12; divide by 24 to get your twice per month average income, or divide by 26 to get your average two week income, or divide by 52 to get your average weekly income.

Lets start with some basics
Averages take what is variable, random and uneven, combines them, and then determines a “middle”. Averages take 34+56+8+21+4+75+5 (which totals 203) and divides it by the number of data points (which is seven in this case). The average here equals 29. The figure 29 in this case is the mean for this set of numbers..

So how do you incorporate the use of averages in personal money management?

You continually monitor two very important figures: your average monthly income, and your average monthly spending. To be clear, when managing your money by averages, your spending is not measured against the amount of money you have in hand, or in the bank this week or that week, or at any one point in time.

So exactly how is this a better way to manage money?

Life goes up and down and all around. It’s highly variable and random. On top of that we have seven day weeks that don't add up to months. We have months with different amounts of days. We have pay schedules that are not syncronized with expenses. We have fluctuating income amounts and fluctuating expense amounts on top of that. This chaotic state easily distracts us from identifying the big picture.

For instance, let's take a different set of numbers such as 10+3+14+15+61+40+60 and say they're monthly totals of what you spent on breakfast over the last seven months. Typical accounting methods expect you to record all this random activity but do nothing to neutralize it. The use of averages totally eliminates these distractions and allows you to easily see detail.

For instance, a typical budget-minded person with a firm $30 per month allocated for this expense above, struggles with the realities of randomness and variability relative to their static budget figure of $30. They attempt financial control by managing each month individually, attempting to stay under the $30 budget figure, and then start over the following month.

To the contrary, if that same person continued to monitor their spending activity as before, but calculated a "running average over time" for these 7 months for this expense, they could easily see through the distractions of randomness and variability that is rampant here.

For instance, the first thing they would come to realize is that even if they spent the figures in the original set of numbers we mentioned earlier (34+56+8+21+4+75+5) in the first seven months, the result would be the same as the new set of numbers we are using in the later (10+3+14+15+61+40+60) the following 7 months. There is no difference. Both total $203 and have a mean of $29 per month.

Point being, regardless of all the variability and differences between each scenario, ultimately, when said and done, it doesn't really matter.

So let's see if you're paying attention

What would your average monthly figure be if we totalled all 14 numbers? Yep. The same $29 per month (the total of all 14 numbers divided by 14). All that variability just washed away and that surpisingly solid figure is still there.

The money manager using averages see's right through the monthly variability, and can now see detail others can't because he can now recognize trends. Despite all the financial chaos and variability over many months, he can pinpoint out his "actual average monthly spending" has been creeping up over the last several months by $2.00 per month on average. But at the current point in time, he’s sees he's actually still under budget by $1 per month over the last fourteen months ($29/month actual versus $30/month budgeted). Is that not precision budgeting?

Summary
Money comes into our life at different times and in different amounts, and it leaves our life at different times and in different amounts. There are no two days alike. Because of all this variability your “current financial state” will differ greatly based on where you are in your financial life cycle during the year. Making what seems to be a typical, responsible financial decision based on a financial snapshot of a few weeks is a shot form the hip. The result of which may not even be “felt” until a few months down the road when your financial life cycle is at a different point. This is how many responsible people slowly creep into debt. Distracted by variability and randomness and the thier financial state of "now", they unknowingly repeat these decisions at high points in their financial life cycles.

When making decisions based on your mean, you’re taking into consideration many months of information and continually determining a surprisingly stable, average monthly figure (as demonstated above). Each month that is added to this equation has a “proportional” effect on the end result. It’s a distilled result of the highs and lows in your financial life. This mean figure easily removes the distractions of variability and is very telling of where you’ve been, where you are, and more importantly, where you’re going. You can easily identify trends and reliably plan your future and easily stay out of debt because your planning and spending decisions are guided by your "mean income" and "mean spending" to date, regardless of what you have (or don’t have) in hand at any one point in time.

The more variability you have in your life, the more you need the law of averages. You should apply this mathematical science to your financial life and monitor both your average monthly income and average monthly expenses. You will find that two bad months divided by a great month is actually three good months and you’re doing just fine. And you can just about guarantee that you’ll continue to do just fine, regardless of how good or bad your current financial state is in...as long as you don’t live beyond your mean.

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