With the economy being what it is, it’s crucial for everyone to have a budget. But like new year resolutions, budgets are often forgotten a few days after they are made – and soon enough we are again overspending.
This time I will stick to it. How many times have that penned through? What most people don’t realize is sticking to your budget is more about changing habits than strengthening your willpower.
The good news is plenty of psychological studies have been done on the subject of changing habits. Here are some lessons we can learn from them:
Willpower is a Limited Resource
Discipline alone will not make you stick to your budget. If it will, everyone would have no problem sticking to their budget. The reason why discipline doesn’t work is because willpower is a limited resource. Studies have shown that while a hungry man may resist a bowl of freshly-baked cookies, his performance on other willpower related tasks – like doing his job – would suffer.
Yet how many of us linger in the shopping centers, promising that we are only “window shopping”? Window shopping may not cost you the money, but it does cost you willpower when you spot something you like. And sooner or later, you’ll snap and buy it “just that one time”. If it’s not that original thing you like, it’s that other thing down the aisle.
And before you know it, you’re heading home, guilty of the new purchase.
Control Your Environment
So instead of controlling yourself, why not control your environment?
Avoiding shopping centers and other temptations would be the first thing to do. Studies have shown that it’s literally “out of sight, out of mind”. That also applies to how much you eat, by the way.
And that is why advertisers spend millions to get in front of their customers! Consistent reminders work to get people to buy more!
But perhaps most important is you don’t draw too much excess cash. Studies have shown that we are more likely to spend – and spend more – if it is easy to do so. By drawing excess cash, you’re more likely to spend on “little things” like a cup of coffee, or snacks.
While spending on these things are not necessarily a bad thing (not if you can afford it), they can bring you out of your budget if you’re conscious of what you’re spending!
And if you have trouble controlling your spending, use a debit card instead and put limited funds into that account… which brings us to the next point:
Automate Your Finances
The best way to control your finances is to automate. Let no human emotion interfere so your manage your cash like a machine.
Every month, automatically divide your salary into several accounts. Some employers allows this and I recommend you take them up! Defaults matter when it comes to your behavior. One study found that just by automatically enrolling employees into 401K by default, contributions increase from 40% to almost 100%.
In other words, most people are not consciously thinking about 401K. If the box was ticked, they just left it there. If it weren’t ticked, they also left it as it is. This “default” behavior is especially problematic is cases like subscriptions. How many magazine or gym subscriptions that you left as they are just because it’s too difficult to cancel? Companies do that intentionally – if you want to cancel, you have to call them up, or worse, speak to a salesman in person, in the name of “security”, of course.
If your employer doesn’t have the option to automatically deposit to different accounts, do it yourself! Open several accounts with your bank (make sure it’s free), and make dividing your salary the first thing you do every month (or whenever you receive your pay)!
Associating Emotions
Having said don’t let human emotions interfere, it is possible to leverage it to your advantage.
Think about the things you hate. Would you ever do it? No. The reason is simple: because you associated an emotion (hate) to that thing. If you’re a shopaholic, you probably associated an emotion (joy) with shopping. Think about it. Most shopaholics feel empty once the stuff are dumped on their beds. What they wanted is the thrill (emotion) of shopping.
So why not associate a negative emotion with breaking your budget? Does only a “weak” person stray from their budget? Repeat that sentence to yourself on a daily basis.
Budget For Fun
But let’s face it, we live in a world of advertisements. It’s not easy to control your environment even if you want to. Associating negative emotions with breaking budgets is great but the ads are associating other emotions that make you buy!
Remember, willpower is a limited resource. Instead of resisting them all, why not set a budget that includes a “fun” fund! If you need to save every penny for 5 years to buy your first home, studies have shown that it’s 99% likely you’re going to fail! Worse, you’re going to resent the process and quit altogether!
Instead, why not save a little less a day and take 7 years instead and spend the rest of the money for you to have fun? It sounds counter intuitive but by having fun in the process, you’ll not only have the motivation to continue, you’ll also be able to “recharge” from controlling yourself.
Emergency Funds
Last but not least, always save for an emergency fund. Things happen in life that no one can predict – your car breaks down, the tap leaks, you may get hospitalized… the list goes on. These are emergencies and they are one of the leading budget-killers for everyone.
The problem is few of us have an emergency fund. So when an emergency shows up, they have no choice but to dip into their savings. “But won’t the net result be the same?”
Financially, yes, the net result is the same. But when you dip into your savings for something you don’t want, it also cost you psychologically. It makes the process of saving not so fun (all these money I saved to repair the car? I could have bought that Gucci!) and you know what happens if you associate a negative emotion with saving.
Ally is part of the team that manages Budgeting Spreadsheet and How to Save Money, which are personal finance guides, based in Sydney, Australia. B
