How I Use The Traffic Light System To Prioritize With PocketSmith

Traffic light methodologies are widely used in project, time and even behavioral management — so why not financial management too? Guest writer and PocketSmith super user Rachel uses her own custom traffic light system, and she shows us how she’s combined it with PocketSmith to organize her finances.

Traffic lights are pretty simple, right? Green for go, orange means slow, and if it’s red you’d better Stop Right Now. It’s not a hard system to understand — which is why I use an adapted version for my finances.

A year ago, I was using a boring but adequate spreadsheet for my budgeting. Problem was, it wasn’t doing the one thing I really wanted: traffic light color-coding. I had the system in my head, but I couldn’t see it on my screen.

Then I found PocketSmith.

Traffic light finances: The overview

See, I’ve always had variable income year-to-year which means I’ve grown used to trimming or growing my budget accordingly. The system is simple: red for bare-bones essentials, Stop, Do Not Pass Go; orange for investing and giving, Slow And Steady; and the all-important income, Green For Go.

When I was unemployed, I stopped spending and investing, and dropped back to the red category of essential living expenses. When I’m in stable work, I can budget from red through orange to the whole dang rainbow. Nested color-coded categories make it easy to see where my priorities are. If I have a drop in income, it’s easy to pause budgets for all categories in that color.

Color-coded PocketSmith categories

Traffic light priority categories

Green

I start with income because it’s easy. This is what I base all my other colors around. If the light isn’t green, I stop on red. If the light is green, I budget based on how much money is coming in and what my needs are at the time.

Red

Even with a decent income, I try to keep my spending contained, which means the red category sits around the 50% mark of my monthly finances. This is my ‘survival number’ — the minimum I need to keep my head above water. It includes rent, groceries, transport, and utilities, with sub-categories for phone, power, and internet.

I find the Dashboard Donut a fantastic way to see this at a glance.

The Earning and Spending Donut found on the PocketSmith Dashboard

 

Orange

Ah, orange. This is my slow-growth-for-the-future category. 

It’s evolved over the years. Once it was the beginnings of a house deposit stashed in the bank. (Remember when term deposits would give you more than 3% p.a.?)

But who can afford a house, right? Now it’s a bit of that, a bit of Kernel’s index funds, and a steady 10% tithe to give something back to the community.

Traffic light not-so-priority categories

Light blue

This is where I branch out from ‘basic traffic light’ to ‘full rainbow’, but only when I have a level of income that lets me. 

Light blue is any voluntary debt repayments — not minimum payments, they’d be in red, but over-and-above. For me, it’s my student loan.

Dark blue

The next bite on my donut is discretionary spending. This is anything that isn’t essential but isn’t quite at the level of ‘complete lavish luxury’ either. It looks different for everyone. Think regular haircuts, new shoes, going for coffee with friends… that sort of thing.

To be honest, a dentist appointment might fall under this. But I digress.

Purple

This isn’t just any purple. This is PocketSmith Purple, for all your most luxurious, splash-out-y expenses… like your finance app subscription. Or shouting your best friends dinner out at a restaurant. Or splurging on a new houseplant or three (No? Is that just me?) I even have a Regret category here, but that’s another story!

It’s a lesser-priority category, so I make my spending proportionately less. If you look at the Earning and Spending Donut, you’ll notice I put about half into red, then progressively smaller amounts into each of the other categories. 

Incidentally, this makes it super easy to tell if my spending is a little out of control one month. The focus should be on the traffic lights. Green, red, orange: income, essentials, slow growth for the future. If purple takes up a full quarter of the donut, then Houston, we have a problem!

The traffic light system might be simple, but simple is good. It cuts down on decision fatigue. It makes slashing expenses during tough times a breeze. And once you’re on your feet again, it opens out into a whole world of brightly-colored possibilities.

Just do me a favor and never run the red light.


Rachel E. Wilson is an author and freelance writer based in New Zealand. She has been, variously, administrator at an ESOL non-profit, transcriber for a historian, and technical document controller at a french fry factory. She has a keen interest in financial literacy & interior design, and a growing collection of houseplants (pun intended).

Related articles

PocketSmith’s Categories Help Steph Keep Her Money Organized
We asked some of our wonderful users to share how they use PocketSmith to be productive with their money and plan for the future. Read how Steph and her husband use PocketSmith to keep on top of their spending and plan for their financial future with features like the net worth tracker.
How To Spot Budget Leaks Before They Become Floods
Mind the leak! It’s pretty normal to experience hairline cracks in your budget from the day-to-day stresses of life, but it’s important to keep them in check. Emma shares how you can spot those leaks and plug them up before they become an absolute deluge.
Paying Tax as a Freelancer
As a part-time employee with her own blog and podcast side business, Ruth Henderson has a more complex tax-life than the average person. That said, she decided from the outset to manage her freelance income the same way she runs her household finances: simply and fuss-free! Read on to see how she organizes her taxes.