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Budgeting...Redefined

Let me tell you something you already know. Budgeting sucks. It's so boring. It's so time-consuming. It's so tedious. Worst of all, it doesn't even help most of us because we give up on it.


It's not our fault. Nobody wants to track every dollar, categorize every transaction into a different category and set category limits, only use cash, or carry around envelopes. What we want to do is make smart decisions with our money. While most of us know we need to do it, getting ourselves to do it can be troubling.



Don't get me wrong - for some people these techniques work very well. For others it's necessary. I'm not talking to those people today. Today I'm talking about the masses.


Psychological Trick: Framing


There's a psychological trick that gets us all the time. It's called framing. Framing something one way or another impacts our behavior. For example, a company that advertises that their product works 90% of the time will have better results than telling us their product fails 10% of the time, even though those are exactly the same thing. Knowing that our meat is 80% lean makes us feel better than knowing it's 20% fat.


Instead of falling for the framing effect we can use it to our benefit. Instead of calling it "budgeting," let's call it a "spending plan" or a "savings plan." After all, that's what budgeting is; a plan to save and spend.


You should carefully consider both spending and saving as part of your overall financial health, but you don't have to tackle it all at once.


Step 1: Savings Plan


Instead of tracking where all our money goes and then hopelessly trying to deprive ourselves, let's figure out what we need to save first. Our savings habits have a far greater impact on our future wealth than the return we get on our investments. Figure out how much you can afford to save and how much you need to save into your various savings and investment accounts (savings account, retirement account, college savings, emergency fund, etc.). Once you do that - automate!


Fewer Decisions To Make


Studies have shown that we have a limited supply of will power, and if we use it up on one task then it's not there for the next. This is where automation helps. You can automate your savings in a number of ways. First you can have money put automatically into your retirement account, and sometimes a Health Savings Account, at work. This happens before it even hits your paycheck so it's very easy. Another way is to change your direct deposit so that some money gets put into a savings account while the rest goes into your checking account. Another way is to set up automatic transfers from your checking or savings into other ac