While a few people in the personal finance blogosphere might truly believe that budgets are sexy, most people probably think of budgets as a pain in the ass, and I would tend to agree. The thing is, however, if you have ambitious savings goals, you probably really need a budget to help you stay on track.
Budgeting depletes your willpower by pitting long term goals against immediate satisfaction, causing psychological and emotional pain and sometimes even aggravating otherwise healthy relationships. But, hey, if it was easy, everyone would be doing it, and we would have a lot more 40-year-old millionaires.
Two popular psychology studies come to mind. The first is about willpower. The researchers found that you really do a have fixed amount of willpower, and when you use that willpower to avoid making a tempting purchase, you are more likely to succumb to subsequent impulses. Supposedly one of the best things you can do fight back against depleting willpower stocks is it to keep your blood sugar up. Lesson being, try not to go shopping or make major spending decisions when you are hungry.
The marshmallow study is the second study that comes to mind. This classic and somewhat cruel experiment looks at the link between willpower and life success. The way it works is that kids were put in a room with one marshmallow on the table in front of them. They were told that if they waited 15 minutes to eat the marshmallow, they would get an extra one as a reward. Later in life, the kids that were able to wait the full 15 minutes were more successful than the kids that ate the marshmallow before the 15 minutes were up. This implication is that success in life (and budgeting) is correlated with your ability to delay gratification. Watch some of the funny marshmallow experiment videos to see what it must feel like for a new budgeter.
But neither of these studies are really central to my point, which is that certain ways of budgeting are much easier than others. I instinctively knew this, but it wasn’t until I came across this article in the tweet below that I was able to better clarify my thoughts.
— J. Money (@rockstarfinance) January 10, 2014
My take on Rob Berger’s article is to build your budgeting efforts around recurring contractual expenses. This includes expenses such as cable, internet, auto insurance, mortgage, rent, cell phones, utilities, etc. The idea is that once you sign up for these things, you really don’t have to think much about them again… they are not as painful to budget for as, say, vacations are. They take willpower out of the equation.
Recurring contractual expenses are often the low-hanging fruit on the budget tree. Not only that, but they can often be some of your largest expenses. When I first got serious about saving money in 2013, I revisited many of these one-and-done expenses. I was able to shave nearly $1,800 per year from our spending simply by switching auto insurance carriers and getting rid of pet insurance. My next step is to find a rental that is $300-$500 less expensive per month, adding a possible $6,000 to our yearly savings that we can eventually put towards a house.
These are temptation-free budget items. If you decide that the spend now vs. spend later tradeoff is worth it, you don’t have to keep convincing yourself again and again in moments of weakness – no extra blood sugar required. Or, in the context of the marshmallow experiment, it is like telling the experimenter to take the flippin’ marshmallow out of the room and just come back with two once the 15 minutes are up (pretty baller move in my opinion).
The bottom line is that if you need to start hacking away at your spending, start with your recurring contractual expenses. Whittle them down as much as you can comfortably live with. Shop around for cheaper plans, get rid of cable, or maybe downsize your house for a little while. Make the move and then quit worrying about it. No sustained willpower required.