Popular author, speaker, blogger, and columnist Carl Richards describes budgeting as being boring but important. Much like flossing. It's not fun to talk about, and it's really not fun to do, but if we don't do it our gums are going to bleed all over the place. Well, the bleeding gums thing is my addition to the analogy...
The problems is that, even though it's important, it's not really understood exactly what it means to be a budgeter.
What Is Budgeting?
Strictly speaking, budgeting is typically known as a way to allot a specific amount of money to a specific purpose. For example, you could specify you only want to spend $100 on lunches this month, and you would try to get as close to $100 as possible. More generally, though, when we talk about budgeting in the world of personal finance, we are usually talking about ways to cut our spending.
It's very easy for marketers and advertisers to trick us into buying things. It often doesn't feel good when we know we shouldn't spend all of our money each month, but we do anyway. This is why we flock to self-help books to try and learn an easy way to get our spending under control. Unfortunately, most of the time these defensive techniques that we learn don't work in the long run.
Here are some of the methods you may have heard of:
Track every penny you spend and don't allow yourself to go over in each category
Stop using credit and debit cards and go back to using just cash
Use just cash, but put the cash into different envelopes each earmarked for different categories
Stop going to the coffee shop
Put your credit cards in ice
This is just a partial list. You may have even tried one or more of these; I certainly have.
Does It Work?
Did it work when you tried a budgeting technique? It didn't work for me. If you have tried, I commend you for taking steps toward making smart decisions with your money. Every method I listed and all the ones that I haven't listed are rooted in good intentions and well-founded ideas. The problem is that we try to implement them as short cuts - the way we use diet fads and the exercise program of the year. We need a better way to change our behavior...
Is There A Better Way?
The best thing we can do to change our behavior is to increase our awareness around what behavior we want to change, and try to get to the point where the good behavior is happening without us having to make any decisions.
Increasing our awareness around how we spend our money is the most important tool we have in our toolbox. If we can train ourselves to make purchases with awareness, our behavior tends to naturally change.
If we can get ourselves to just notice what we are doing, we can trick ourselves into not spending habitually. We can start spending on purpose. Our goal is to align our use of money with what we say is important to us. By spending habitually, we tend to spend money on things that aren't important to us.
Tips to Increase Awareness
One tip that you can implement immediately is to use the 3-day rule. Before making any purchase, wait for three days after you would have purchased it. Then see if you still want it. If you use Amazon or another online platform, this is very easy. Just put things in a wish list, or in your cart, but don't check out today. You will be surprised by how many things you thought you needed. This helps us reduce impulse purchases and gives us time to process whether or not we are buying something that aligns with what is important to us. I can't even count how many books I have purchased over the years that sit behind me unread. By keeping new books in a wish list I no longer keep them on my bookshelf after I purchased them. I now keep them, un-purchased, in an Amazon wish list.
Another tip that is very beneficial will seem awkward to you at first. Dedicate three seconds after each purchase to look at your receipt (yes, get receipts), and just say to yourself, "I just spent $x on y. Isn't that interesting?" I know a guy who loves the sandwich chain Jimmy John's. He got the #9 all the time. He realized that if someone asked him how much he spend on lunch he wouldn't know. So the next time he looked at his receipt and said, "You just spend $7.50 on a sandwich. Isn't that interesting?" After doing that one or two times he just naturally started going home for lunch. Remember, though, the goal isn't to try to change your behavior. It's just to become aware of how we are spending our money. Behavior change will come later. And the point isn't necessarily to save money. It's just to help us make sure our spending is aligned with what's important to us. This tool is not punishment for spending, not shame, and not blame. Just increasing awareness.
The other tip that I recommend is to automate all your savings. By doing this you won't have to actually make the decision each month or each payday to deposit money or move money into your savings accounts. It will just happen. And, since most of us spend whatever money we have, this will naturally reduce our spending because there will be less money available in our checking accounts.
Over the weekend I talked with a guy who used to write checks to deposit into his retirement accounts. Then, he would keep the checks there until the end of the month (he is self-employed and wanted to make sure there weren't surprises before he sent the money in). The next month, he would write another check and set it on top of the first one. Then a third check would go on top of the first two. He would never bring the checks in to get deposited. If this decision was automated, he wouldn't have had to make 12 decisions each year. He would have only made one decision when he first decided to start the automated savings.
You can set this up in many ways. If your check from work is deposited directly in your bank account, ask your HR department if you can have a portion of it deposited into a savings account with the rest going into your checking account. Your bank might have a similar feature, where you can set up a monthly transfer from one account to another. Your 401(k), 403(b), or 457(b) account that you have at work is money that comes out before any money is even deposited into your checking account. These deposits are automatic and the investments are taken care of for you as well. Contact the financial institution where your IRAs are held and see if you can set up a recurring transfer from your checking account. Have your credit cards take their payment directly from your checking account so you don't have to know you are paying them. Increasing our level of automation decreases the number of decisions we have to make.
By implementing these tools and increasing our awareness around our use of money will let us become an impartial observer to our behavior. You know how it's easier to point out the flaws in someone else than it is to recognize them in ourselves? Well, becoming an impartial observer helps us see ourselves through a new set of eyes. If we are successful in automating our good decisions and increasing our awareness, we can start to see how we might be able to spend less and save more.