The Budgeting Blues. Like flossing one’s teeth, everyone knows we’re supposed to budget regularly. Yet it’s not surprising that less than 40 percent of Americans floss daily and a similarly low proportion have saved enough to meet an unexpected $500 bill. Coincidence? The benefits of both are intangible and in the future, while the inconvenience and annoyance are concrete and immediate. Our present bias, self-control limitations, and life circumstances, can cause us to neglect what we know is best for us in the long run.
But budgeting has additional baggage. While many people don’t floss correctly, the consequences are delayed until our next dentist visit. For many, exceeding a budget for, say, dining out, hurts us more than being under budget pleases us. In addition, there is the challenging ambiguity of choosing the “correct” budget limits for various categories. Finally, there’s the work of recording or downloading transactions and categorizing them. As a result, I and many people I’ve interviewed, tend to budget only informally. To make sure I saved enough, I have relied on automatic 401(k) deductions from my paycheck and a habit of investing my annual bonuses.
Budgeting to Financial Wellness. More’s the pity because good budgeting is necessary to each of the four aspects of the CFPB’s definition of financial wellness:
- Control of your daily and monthly finances: “Control” means not necessarily spending less but spending on the right things. Is your spending aligned with your values, does it meet your needs and make you happier?
- Security to be able to handle an unexpected expense: Life is full of costly emergencies like medical bills, repair bills or unemployment. If you’re unprepared, these costs can be more painful. The first and most important job of a good budget is to build a rainy-day fund.
- Freedom to make choices that allow you to enjoy life. A good budget promotes such freedom by encouraging you to mindfully set spending priorities to those that make you happiest. A good budget gives you the flexibility to adjust your spending during the month as needed.
- On track to meet your long-term financial goals. Once your rainy-day fund is built, effective budgeting will continue to support the saving habit for a lifetime, until one’s retirement is secure.
The first and most important job of a good budget is to build a rainy-day fund.
Budgeting Psychology: Budgeting is fundamental to the good life because it helps those with self-control challenges (most of us!) to meet their long-term goal of building savings. As a commitment device, it can protect us from future temptations so that we can do right by our future selves. It relies on mental accounting, to control our spending by artificially separating spending and investing money and setting limits on individual categories of expenses. Those with more severe self-control issues may be better off not budgeting but instead setting up forced savings strategies where the savings is not readily available.
Budgeting Happiness: In addition to building wealth, a budget ought to be used to create happiness. Here’s how our unique approach works:
- Commit to long-term monthly savings amount. This is first because the top goal of a budget should be to build resilience and wealth. “Pay your-self first!“
- Identify several universal human needs that, if met, have been shown to contribute to happiness. These include: social interaction and love; respect and pride; autonomy and self-direction and helping others. Decide whether each of these needs are currently met or unmet for you.
- Figure out roughly how your spending maps to these needs.
- Re-allocate spending from needs that are met to those that are unmet. For example, if the Leisure & Fun (e.g. things like music and movies) need is met, but Love & Friendship (e.g. things like dining out) is not, then maybe spend a little less on the former and a bit more on the latter.
Budgeting Mindfulness: We know that budgeting is virtually mandatory for financial wellness. It seems like a lot of work, and it is. That’s why we designed Decision Fish’s budgeting tool to make the process easy, although the user still must be mindful about what makes her happy and how spending may or may not contribute to that. Done right, budgeting is not just about setting aside money for some unknown and distant future but also about making us happier, healthier and contributing adults in the present. It need not be tedious, frustrating and embarrassing. We see it rather as a tool to help us be our best selves. At least, it will better prepare us for those surprising dental bills!
Decision Fish is building a fun, online financial wellness program. We are looking for people willing to try it out early, even before it’s available to the public. Do you work at a company that still doesn’t offer a financial wellness benefit? Contact us or forward this to a friend using the share buttons below.