Maeda’s second law of simplicity is “Organize.” In this law, he maintains that through organization, you can achieve the semblance of reduction. He goes on to describe a system that he calls “SLIP: Sort, Label, Integrate, Prioritize.” Through this system, you can organize just about anything, without resorting to short term solutions such as a bigger home, storage facility or elaborate closet organizers, which all serve to either change the stuff to space ratio or simply structure the chaos.

The concept of SLIP is to organize based on “What goes with what.” Think of this similar to folding and putting away your laundry. You probably put all your underwear and socks in one drawer, all your shirts in another, ultimately with all your foldable clothes in a dresser, all your hanging clothes in the closet and all your linens on a shelf in some other closet, all of which are grouped by type. With SLIP, you take this concept and apply it systematically to EVERYTHING.

SLIP: Sort

The process of sorting can be done with just pencil and paper. You start by writing everything that needs sorting down on separate pieces of paper, such as post-its. Once everything is on paper, you start moving the papers around on a flat surface and create rough groupings. Once these groupings are complete, you move on to Label.

SLIP: Label

This step is both the simplest and most complex task in the whole process. Once you’ve sorted, you need to decide on a relevant name or, if you can’t come up with a name, an arbitrary code for each group. As you proceed with the next step, some of these labels may disappear or change, so don’t put too much effort into this.

SLIP: Integrate

In this step, you take significantly similar groups and integrate them, sometimes breaking apart some groups in order to better integrate their components with other groups. The overall result should be a reduction of groups to as few logical groups as possible.

SLIP: Prioritize

Once you’ve sorted, labeled and integrated, it is time to prioritize items. In order to do this, Maeda suggests you use “The Pareto Principle as a rule of thumb.” This principle generalizes the concept that approximately 80% of anything can be controlled by approximately 20% of something else. For example, approximately 80% of your to-do items can be accomplished with approximately 20% of your time. Thus when prioritizing, you put the “vital few” items as your initial focus.

So now we know all about “SLIP” and organization, how do we apply it to personal finances? One way is setting up our first budget. We go through our various statements and find all our monetary flows, such as:

• Paycheck 1
• Paycheck 2
• Credit Card 1
• Credit Card 2
• Credit Card 3
• Auto Loan
• Mortgage
• Grocery Store
• Clothing Store (unneeded clothes)
• Movie Theater
• Auto Shop
• Gas Station
• Home Improvement Store
• Vacation 1
• Vacation 2

If one were to go into detail on the transactions, these could be the first set of labels, but for simplicity, let’s assume that these ARE the transactions. Once we’ve identified these transactions, we group them together like so:

• Income
  • Paycheck 1
  • Paycheck 2
• Credit Card Payments
  • Credit Card 1
  • Credit Card 2
  • Credit Card 3
• Auto Expenses
  • Auto Loan
  • Auto Shop
  • Gas Station
• House
  • Mortgage
  • Home Improvement Store
• Fun
  • Movie Theater
  • Vacation 1
  • Vacation 2
  • Clothing Store (because the clothes weren’t needed)
• O1 (Random label)
  • Grocery Store

At this point, we’ve sorted and labeled, now we need to integrate, perhaps like this:

• Income
  • Paycheck 1
  • Paycheck 2
• Debt
  • Credit Card 1
  • Credit Card 2
  • Credit Card 3
  • Auto Loan
  • Mortgage
• Upkeep
  • Home Improvement Store
  • Auto Shop
  • Gas Station
  • Grocery Store
• Fun
  • Movie Theater
  • Vacation 1
  • Vacation 2
  • Clothing Store

Now that we’ve integrated, we move on to the final step of prioritizing. For this example, we will have three categories: Income, Required Expenses and Splurging (aka Discretionary Expenses). Ultimately, we organize our transactions like this:

1. Income
   • Paycheck 1
   • Paycheck 2
2. Required Expenses
   • Credit Card 1
   • Credit Card 2
   • Credit Card 3
   • Auto Loan
   • Mortgage
   • Auto Shop
   • Gas Station
   • Home Improvement Store
3. Splurge
   • Movie Theater
   • Vacation 1
   • Vacation 2
   • Clothing Store

From this prioritization, it is relatively easy to go on and create a budget. This example is just the tip of the iceberg. For every person and situation, there are an infinite number of ways that they can SLIP into a budget.

Last week, I wrote a short review of John Maeda’s Laws of Simplicity. This week I want to introduce you to his first law, “Reduce.” In this law he lays down the concept of “SHE: Shrink, Hide, Embody.”

SHE: Shrink

Maeda points out in his book that large things tend to be fear inducing, while smaller things tend to be perceived as “mostly harmless.” In our world of personal finance, we have all learned this lesson well by the way we have gotten ourselves into debt.

That little peace of plastic seems harmless, but we now open our monthly credit card bills at some excessively high interest rate and see the balance near that really high limit and, at least until we took control of ourselves, wondered how the heck we were gonna get out of this, let alone pay just the minimum due. Now add all the debt together and you get this behemoth that instills even more fear and trepidation and you start to feel extremely helpless, perhaps in some cases considering drastic measures that could do even more damage to your credit or, to the most extreme, your health.

This law of simplicity can now be applied in reverse. Following David Ramsey, we take that behemoth of a debt and break it down based on current balances. We then order by smallest balance to largest balance and blast our way through with snowballing and snowflaking, while increasing our total snowball as we find ways to shrink our overall spending habits to the point where we spend less than we earn. As we are doing this, we are shrinking that behemoth down and removing the fear it induces, but maintaining a bit of respect for it’s ability to grow at any sign of weakness.

SHE: Hide

In order to further simplify things, Maeda suggests that after shrinking things as much as possible, we start hiding stuff. As we shrink our spending and debts, we all realize that having credit cards is not the problem, but using them is, so some of us hide our credit cards to help us train to rely on other, non credit based ways of buying what we need and want. As we learn and change, we may decide to close an account or bring a card out of hiding and back into responsible circulation. While it’s great to hide credit cards, you can also hide various asset accounts such as savings accounts.

When you hide a savings account, you are just hiding it from yourself and not the government, you simply pay no attention to the balance over time, letting the power of compounding work over time. Let’s say you have a savings account that starts out with a balance of $100, with an interest rate of 12%, compounding & crediting monthly. If you check once a month, you will see a 1% gain over the previous month’s balance, but if you check only at the end of the year, you will see the entire increase of about 12.68% in one sitting and feel a greater sense of accomplishment than watching month to month. Now only look at it once every five years and you will see the total growth of 81.67% in one sitting, rather than seeing the 12.68% per year or 1% per month. If you were to put in $100 at the beginning of each month over the same 5 years, you would see a whopping $8,248.64 and your ego would say I have a heck of a lot of money here. Not only do you get an ego boost, but hiding the account reduces the temptation to raid it for something, since you let yourself forget it’s even there.

Of course the best time to check up on your hidden assets is when you are preparing your tax returns, since you have to look at the interest & dividend statements (USA: IRS Forms 1099). Let me reiterate, in this case, hiding your assets is only hiding their value from yourself, NOT from your government. I will never endorse illegal activity, maybe someday I’ll endorse highly risky and just barely the right side of the law, but NEVER illegal.

SHE: Embody

As things are shrunk and stuff is hidden, we must imbue a sense of increasing value into whatever is being reduced. How can we do this with our debts and personal finances? We really don’t want to make our debt seem more valuable, so how do we embody debt reduction? It’s simple really, we blog about our journey from extreme indebtedness to financial freedom. But what about those of you who are not blogging? You are doing it right now by reading this and other blogs about personal finances and debt reduction. If it weren’t for readers, who would blog?

Conclusion

Maeda’s first law of simplicity is “Reduce,” which consists of the principle “SHE: Shrink, Hide and Embody.” As we work our way out of debt to financial freedom and beyond, we shrink both our debts and our spending, while hiding debt creators and some assets and embodying the whole concept through reading and/or writing blogs. This first law is fully embodied through our first goal of reduction/elimination of debt.

I know my readership is low now, but I’ll bet I will have some rather large peaks throughout this series and I welcome you all to my blog and hope you will subscribe to my feed. Please stay tuned for further installments to this and other “postponed” series.

You need a strategy for paying off those credit cards.  There is but one strategy, snowballing.  This method takes a set amount of money and applies it across all debts, paying all minimums with the remainder going to one particular debt.  There are several possible orders in which to approach this.

1. Order them from highest interest to lowest interest, focusing on the highest interest first. Paying them off in this order will minimize the interest you pay.
2. Order them from lowest balance to highest balance, focusing on the lowest balance first. You’ll gain a sense of achievement as each balance goes away and the next one accelerates when you shift those original payments to it.
3. Order them from highest balance to lowest balance, focusing on the highest balance first. This method will give you a greater sense of achievement as balances are paid off, BUT you may continue to feel hopeless since it will take longer to get rid of the balances.
4. Order them from lowest rate to highest rate, focusing on the lowest rate first. This is similar to number 2, since more of your payment is going towards principle. With this strategy you may want to consider doing a balance transfer to the lowest rate card from the highest rate card, thus combining it with number 1.
5. Order them by “duration until payoff.”  This is done by taking the current principle plus accrued interest and dividing by the current minimum payment.  This method may result in one of the previous four methods, but this is not necessarily so.  You would focus your efforts on the debt with the lowest duration.  This will most likely result in a faster sense of achievement than number 2, since the lowest balance may not have the fastest payoff.
6. Order them in the order you want to pay them off, focusing on what’s most important to you. This is a great way to do it if you include other loans, such as a loan from a friend. You’ll receive a similar result to number 2.

After you decide the order you are going to attack your debt, you need to decide whether you want to use standard or reverse (my term) snowballing.  In standard snowballing, you fix the current minimum payments and use them as the minimum amount paid each month.  Reverse snowballing can result in paying the first loan off faster, since you fix the total amount paid and apply the remainder after current minimums to your first loan.

Now that you know about snowballing, stay tuned for pairwise comparisons of the various methods mentioned above.