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There’s another factor that prevents people from being model financial citizens (besides, of course, uncontrollable circumstances like joblessness). As a species, humans are notoriously poor at following through with their plans. Sticking to a budget — a dirty word even among many financial planners, who prefer the more euphemistic “spending plan” — feels too much like dieting. And we often fail at both for the same reasons: too much focus on the restrictions, not enough on fun. So it’s not surprising when people end up bingeing later, more than making up for dollars not spent or calories not consumed.
On Mint.com, the popular money-tracking Web site, top goals among the nearly half a million users who set them include paying off debt, creating an emergency fund and saving for retirement. All virtuous goals, to be sure.
The battle, say money and psychology experts, is finding ways to close the gap between good intentions and human nature. So at a time when every dollar counts, how can you accomplish what you’re not necessarily wired to do?
It may be a while before that smart wallet hits the shelves (a hinge in the middle of the wallet, wired to your bank account balance via a Bluetooth connection to your cellphone, makes it harder to open as you reach a spending limit). The main inventor, John Kestner,said he’s working on bringing its retail price down to $60, to “avoid obvious irony.”
But there are plenty of mental tricks and strategies that can make your budgeting more sustainable now. In fact, the best strategy is not to think about it as budgeting at all. Instead, set up broad goals and automate all savings and other priorities where you can.
“Self-control is wonderful, but it’s just not sufficient,” said Meir Statman, a finance professor at Santa Clara University who focuses on behavioral finance and is the author of “What Investors Really Want.”
Start by becoming more conscious of your spending, whether you jot it down in a notepad, on a spreadsheet, or on Web sites like Mint.com. Then, give your spending plan a sense of purpose; budgets with a goal, whether it’s a European vacation or buying a home, tend to be the most successful.
“For there to be sustainable change, there needs to be some sort of positive motivation,” said Amanda Clayman, a financial therapist in New York. People tend to set unrealistic goals that don’t factor in their lifestyle, she said. “Ultimately, what we want our money to be is an energy source,” Ms. Clayman said. “It should help us get somewhere or do something.”
One strategy to keep spending in check is to employ what’s known as mental accounting — dividing your money into separate mental accounts that you treat differently.
“From a psychological standpoint, there is merit to having a separate account for entirely discretionary or luxury spending,” said Steve Levinson, a psychologist and co-author of “Following Through: A Revolutionary New Model for Finishing Whatever You Start.” Spending $100 out of $300 earmarked for fun will feel more meaningful than pulling out $100 from your entire $3,000 monthly budget.
The easiest way to set up a system, experts suggest, is to put your income into separate accounts or subaccounts, including one that distinguishes spending money from money needed for recurring household expenses. And think about working backward, as a way to keep things simple: instead of setting up an overly detailed budget, first decide how much you want to save for retirement and other goals, then work with what’s left over. If you want to cut spending, attack a few big categories where you can make the biggest difference.
Life has a natural way of derailing even the best-laid plans, so experts recommend building a cushion, or a slush fund of sorts. “It’s the one-time expenses that kill a budget,” said Rick Kahler, a financial planner in Rapid City, S.D. “The average person needs to be saving for car repairs every month, they need to be saving for their trips, for Christmas, for medical expenses.”
Just don’t rely on doing it yourself. Arrange to have the money withdrawn from your paycheck. “We need to exploit automaticity,” said Professor David Laibson, a behavioral economist at Harvard. He points to the success of automatic enrollment of new employees into retirement savings plans, like 401(k)’s. “We need to build in more of these commitment mechanisms, so we can live up to our intentions.”