Thrift is in! How to Make "Budget" a three-letter word . . .

Dave Bucholtz, Bucholtz Consulting

The great American inventor Charles Kettering stated “A problem well stated is a problem half solved”. So what's the problem with budgeting? Why is it so hard for so many to save and spend less than what they earn? In this article we will explore common pitfalls which hold people back and learn how to achieve money success. So, off we go...

Know thyself. How well do you know yourself? Is it easier for you to spend money or to save money? Do you consistently save at least 15% of your income and spend less than what you earn? If you do, you are a “natural saver”. If you are a natural saver much of the budgeting process will come easily to you and may even seem like “fun”. If you have more of a tendency to spend, it is important for you to discover methods to make you successful at saving money and budgeting in order to reach your goals. Most people fall in-between the spectrum from Extreme Savers to Extreme Spenders. Be honest with yourself before moving forward. Do not practice the art of self-delusion when it comes to your money habits!

If married, work together with your spouse.  Being married is hard work! We tend to seek out a partner who balances our weaknesses with their strengths. Our spouse seems to look at things differently. And while the different perspective can help make better decisions, getting to the decision can be exhausting. Before you embark on a spending plan your spouse must be on the same page. Budgeting is simple, but not easy. You need to think about what would motivate and drive your spouse to make a commitment. And since we are often married to opposites, what motivates you about money may not mean much to your spouse. And you need to do this without making your spouse feel wrong about how they view money.

Consider earmarking accounts. One method is to put money into buckets that are to be used for only the purpose they were set aside for (college, home improvements, car fund). To a natural saver, this makes no sense to them. They look at it as one big pot, but to a spender it works. A spender will generally not dip into earmarked funds since they feel a sense of failure and insecurity when they do. I believe if it works, use it!

Focus on the last incremental dollar. How much are the little extra's costing you? The morning cup of coffee you have to have? Or the pack of gum you buy for the kids? If you spend $1.50 on something every week you will spend about $75 per year on that item. If you spend $1.50 per day, you are spending $550 per year on your habit. And these dollars you spend on the extra little things are the only dollars available for saving for retirement, for a vacation, for college, paying down debt, etc. since most of our money is already spoken for with our fixed expenses. Little things really do mean a lot! 

Frequency matters! When we purchase big items, we tend to haggle, shop, hunt, to the ninth degree. Think about how often you buy a new refrigerator. Probably once every 10 years or so. If the refrigerator you are looking at costs $1200 you will hunt and hunt for the refrigerator you want for $1100 to pick up the $100 savings. If we spread the $100 savings out over ten years, you basically saved $10 per year over the life of the refrigerator. That's good. Here is the problem. We do not use the same “shopping tenacity” on items we shop for more often. If you shop at Target every two weeks, and you tend to spend $10 on something you don't necessarily need each time, you will spend $260 extra dollars throughout the course of the year. So you spend 26 times more ($260 per year vs. $10 per year) than the annual savings you earned by shopping for your fridge. In my experience, women tend to have a frequency issue (It's only $35! What's the big deal?), where men tend to do their spending damage in bigger chunks (How can I have a Super Bowl Party without a big screen TV?).

You must control both high frequency spending and big ticket items to experience success. But how?

Understand how we make decisions. Respect the power of positive, immediate, certain vs. negative, future, maybe. We make decisions in predictable ways. Let me illustrate this with dieting. Let's pretend I want to lose 10 pounds. If I find myself staring at a beautiful, delicious, donut just sitting in a box on my kitchen counter, my mind is racing! I am deciding whether to eat it or not. The donut will taste great (positive), right now (immediate), definitely (certainty). Sounds hopeless. I'm already eating the donut, right? Not quite. What if I think about what eating the donut will do in the long run? If I eat it I will gain a little extra weight (negative), but not right away (future), and who knows maybe I won't even gain any extra weight because I might jog a little extra (uncertain). So do I eat the donut? It will depend on whether I focus on the positive, certain, immediate benefit of eating the donut or the negative, uncertain, future consequences of eating the donut. This is temptation, self-control, will-power and it's tough! We are hard-wired to choose the positive, immediate, and certain option. So what does this have to do with spending? Everything.

What happens when we buy something? For the ladies, maybe a new pair of shoes or boots and a purse. For the guys, maybe a 52” flat screen with Bose Surround Sound and a Blu-Ray disc player. When you buy something you get the positive, immediate and certain benefit of owning it. Now think about paying for your purchase with a credit card. Paying for it by credit is still negative, but you pay in the future, and it's not as certain because you are able to delay. But unlike dieting there is a simple way to help you make a better choice. Here's how:

Go on a CASH BUDGET!! Let's look at the table below to see how we make buying decisions with credit cards...

USING CREDIT

Owning IT

Paying for IT

Positive

Negative

Immediate

Delayed

Certain

Not as Certain

 

With credit the positive feelings are immediate and certain. But the negative feeling of paying for it is delayed, and since it's delayed it is not as certain. You hardly stand a chance when using credit. But what happens when you use dollar bills?

USING CASH

Owning IT

Paying for IT

Positive

Negative

Immediate

Immediate

Certain

Certain

 

Now when you pay with cash, you still get what you want, it feels good, right away, definitely. And paying for it is still negative, but it is negative immediately and certainly since you must part with your hard-earned dollars to gain the object of your desire! Now your decision is not clouded by how you are paying for it. Your decision is simple.Is the benefit of what you want worth the cost? You will be surprised at how your buying habits change when you switch to cash. (You may also have a feeling of satisfaction when you pay with cash, but more on that next letter.) 

As Americans, we are all painfully aware that use of credit dramatically increases consumption. So to decrease your consumption, eliminate or decrease your use of credit. Simple, but not always easy.

Next time we'll go over how to build your cash budget to make it fun and fulfilling for spenders and savers alike.It truly can improve your life.