The Seven Wastes of Personal Finance

Back when I was in cubicleland, in my last corporate job, I went through the very good Six Sigma training and certification program offered by my company: Green Belt, Black Belt and Master Black Belt. I did not get the MBB certification though, time was ripe to quit before I finished it…

Six Sigma, or continuous improvement,  had three “tracks” (three ways to go about it): “Variation” would be the traditional way of improving processes with stability and control, “Lean” is the waste-reduction way (and the subject of this post), and “Design” is likely the best and most difficult way because processes are optimal from their inception.

Lean strives to eliminate seven “types” of waste, the “seven wastes”. This technique was developed initially in Japan by Taiichi Ohno but now is learned and used everywhere.

seven wastes

(I remember the acronym they taught me to always remember them: TIM WOOD.)

So here are the definitions of the seven wastes, traditional examples and applications to personal finance.

 

Transportation

Moving stuff. Moving stuff costs money and time. Not to be confused with “movement” which is YOU moving to keep the process going.

An obvious example from manufacturing is moving parts from one factory to another, or from any spot to another.

It is relatively easily to avoid transportation in these personal finance activities: mailing checks, going to the bank for a transaction, using ATMs, carrying cash.

Inventory

Things you keep for later. It is bad because it costs money to keep: storage space, insurance, withheld capital, depreciation, shrinkage, even risk of obsolescence.

In industrial environments this is usually finished goods (like a car parked at a factory’s lot, or the dealer’s lot) and work-in-process inventory (or work-in-progress), also known as WIP. Any part lying around in the factory floor that will end up in the final product is WIP.

The most obvious example in personal finance is cash. Cash may be king but “cash costs money”, because of inflation but more importantly because of opportunity loss. Keep your money (or should I say your capital?) working for you. Of course cash is necessary, but it is better to keep it on the low side.

Less obvious inventory is anything you have (you’ve bought) that you actually don’t need: the extra car, the way-too-many pairs of shoes, the house you got when you bought all the house you could afford instead of the house you actually needed, etc.

Movement

You, moving. Either moving your whole self from one place to another or moving a body part. Not to be confused with “transportation” (things moving).

Examples? Going often to a tool crib to pick up a tool, or moving your arm repeatedly or twisting your neck, which can both lead to pain and chronic injuries.

Wasteful financial moves are day trading, writing checks (that have to also be ordered, found, signed, mailed and balanced), getting a paper paycheck instead of direct deposit, not using payroll deduction for 401k and HSA deposits, carrying cash.

Wait

If time is money then wait is money lost.

Parts queued in front of a machine are waiting.

Wasteful financial waiting: waiting to save until you earn enough, to invest until you save enough, to retire until you are old enough…. The cost of such wait can be hard to measure.

However, since wait involves time, and money correlates with itself across time with interest rates, the rates let us neatly add numbers and measure the cost of the wait.

The exception to the rule (or the main reason for the rule? …I don’t know): it is always better to wait to buy something until you have the money to pay for it.

Over-production

Producing too much.

This is probably the most pernicious of all seven, because it can lead to most of the other six. (It leads to more inventory, transportation, movement, wait, etc).

Lifestyle inflation is a good example of over-production. It is an epidemic disease, the curse of success in modern society. Speaking of society, you inflate your lifestyle because  “You think you have to want / More than you need” (from “Society”, by Pearl Jam).

And the biggest symptom of over-production is debt.

Over-processing

Processing too much. Fine tuning too much. Achieving a level of quality in your product that the customer didn’t ask or needed, and will not pay for.

For instance, if you are making widgets with a dimensional precision of ±0.1mm and your customer needs only ±0.2mm, then you are wasting your resources.

Obsessing over your budget, logging 50-cent expenses, re-balancing your investments monthly, trying to outsmart and beat your index fund are all pretty good candidates for over-processing.

Defects

Defect = bad. One would think these are easier to find than the previous six, but they may not be. They can certainly be easy to recognize when you spot them, which is not the same thing.

If that widget from earlier had two holes, it would be defective.

The first defect that comes to mind in personal finance is fees. Paying them. Bouncing a check, incurring ATM fees, not paying the credit card balance every month (and paying insane interest rates), excessive mutual fund fees, penalties for misusing IRAs or HSAs are all defects. Paying avoidable taxes, missing deductions, not itemizing when you can, ignoring the difference between short and long term capital gains are defects as well.

I am going to quit wasting.

What did I miss?

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