5: The Difficulty of Budgeting

Question: I find budgets helpful, but it’s hard to stick to them. How can I do a better job?

This is post number 5 in our ongoing Question and Answer series: “Hacking Personal Finance: Behavior, Not Budgeting”. Check back daily, or Follow @commoncentslab and @advancedhindsight on Twitter, or sign up for our Daily Bits course to find out more ways you can use behavioral science to help manage your money.

Advice from the Lab: You wouldn’t calorie count. Why budget? Use other tactics like automation, reminders, and accountability.

We recommend you leverage a phenomenon known to behavioral scientists as mental accounting. Mental accounting is the tendency for humans to want to put objects in groups and then keep them there. We can use this mental quirk to help you stick to your budget.

Once your budget is made, automate your bills, savings, and rent. For everything else, use cash. When you get paid, take out the cash you will need to stick to this week’s budget. Then, label an envelope for each of your budget categories (coffee, lunch, gas, etc.) and put in the right amount of cash for each category. This method is helpful for three reasons

1. Cash provides a much more salient cue of when and how much money you’re spending than a credit or debit card.
2. It’s much easier to keep track of how much you have spent.
3. It makes trade-offs very salient. Dipping into the family grocery budget just to buy yourself a coffee feels wrong!

To add another level of accountability, recruit a trusted friend or significant other to act as the banker. Put them in charge of the envelopes and instruct them to ask you what you need the money for each time you withdraw from an envelope. Give them as much power to say no as you feel comfortable with!