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Make Your Finances Six Sigma! November 20, 2007

Posted by pf in Expenses and Savings, Goals, Uncategorized.
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Six Sigma excerpts from Wikipedia:

Six Sigma is a set of practices originally developed by Motorola to systematically improve processes by eliminating defects.  The term “Six Sigma” refers to the ability of highly capable processes to produce output within specification.  In particular, processes that operate with six sigma quality produce at defect levels below 3.4 defects per one million opportunities.  Six Sigma’s implicit goal is to improve all processes to that level of quality or better.

Some of you may be familiar with Six Sigma in your workplace or may have at least heard of it.  In general, the idea of of Six Sigma is to reduce defects / variation in your process in order to create a more consistent output or result.  Achieving Six Sigma is extremely difficult…many processes don’t even make 5 sigma!  One of the most common approaches for Six Sigma is called the DMAIC method (Define, Measure, Analyze, Improve, Control).  You can apply this approach to your personal finances in order to reduce defects in your personal finance “process”

 DEFINE – In the define phase, you need to identify what your problem and goal statement as well as make a strong case for change.  An example could be:

Problem:  “My current debt is X which is limiting my ability to achieve my longer term goal of retiring at 62″

Case for Change: “If I do not get my debt under control, I will not be able to retire comfortably…or at all!”

Goal Statement: “Reduce my debt to Y”

MEASURE:  In the measure phase, you identify all the potential causes that are impacting your ouput (in this case the amount of debt you have) and collect data / information on it.  Examples could include:

  • Not staying within budget
  • Not having a budget
  • Expenses, such as:
  • Car
  • Entertainment
  • Clothing
  • Electronics
  • Restaurants
  • Spouse does not share same financial values as I do
  • I am undisciplined
  • I do not maximize my savings
  • I make impulse purchases
  • I do not make enough income

The list goes on and on.  Essentially, you want to identify those things that may be causing you to create debt.

 ANALYZE:  In the Analyze phase, you take all of the potential causes you have identified and try to determine which ones have the most significant impact on your output (debt) and drill down to identify their root causes.   For example, if you feel that the money you spend on entertainment is a significant contributor to creating debt….why is that?  (ex: you love to eat out, you hate to cook, you don’t have a stove, etc).  You have to dig for the deeper reasons or root causes behind the factors you have identified.   If you don’t know the “why”, then you will find it very difficult to come up with solutions to your problem.

IMPROVE:  Now that you have identified the root causes that are contributing to your debt, you can brainstorm potential solutions and then implement them!  Examples could include: eating out only 2x / week instead of every day, avoiding the big splurge for the 4 star restaurant, etc.  These are very simple examples…but you probably get the idea!

CONTROL:  Control is a very important phase in that you now need to make sure that the improvements you make can be sustained!  A perfect example of this would be making a budget based upon your recommended improvements and then tracking your progress.  You will be able identify when your process is “out of control” and drill down to determine what went wrong and how you can get it back in line.

A few parting thoughts:

  • Generally, if you can’t measure what’s going on in your financial process (ex: maintaining a budget), it will be difficult to fix it
  • You don’t want your financial process to be exciting with all kinds of ups and downs (variation), you want it to be boring and consistently produced the expected output (ex: increased net worth)
  • The DMAIC process can give you a framework / approach for improving your financial “process”
  • You might even learn something that you can apply at work – bonus!
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