Quick Budgeting Tips That’ll Save You Big!

Quick Budgeting Tips

Helping you make better spending decisions is a primary purpose of this blog. Sticking to them is the other.  These budgeting tips require little time and effort, but will have a major impact on your savings account.

There are a two ways your brain is hard-wired that make better spending decisions hard.

  • Adaptation to pleasure
  • Mis-predicting pleasure

Budgeting Tips – Adaptation to Pleasure

Our brains are hardwired to notice novelty. When an experience is new you get a lot of pleasure Quick Budgeting Tips For Being Happyfrom it. As you continue to have the same experience, you get less pleasure from it over time. Pleasure turns to comfort, and disappointment can set in. “I thought this would make me happier. Now I’m disappointed because I’m not as happy with this as I thought I would be.”

The second reason we adapt to pleasure is that our reference point changes. Maybe you get a new job and you’re making $10,000 more a year than you were before. You’re thrilled. Then you find out that you’re making 5% less than the next newest employee. Now you aren’t thrilled – your reference point has changed. Instead of comparing to what you used to make, you are now comparing to what you could be making.

Budgeting Tips – Mispredicting Pleasure

We consistently predict that things will make us happier or more miserable than they actually do.

The extreme example of this is lottery winners vs. accident victims. Several studies in psychology show that the strongest predictor of a person’s level of happiness after their circumstances change is their level of happiness before the change. Of course, this isn’t true immediately after the change, but over time people tend to revert to a sort of happiness “setpoint”.

Of course, accident victims are less happy than they were before – the point is the different is MUCH smaller than anyone would expect.

And this more recent study also confirms that the immediate impact of change in circumstances is much bigger than the long-term effect.

Daniel Kahneman calls this the hedonic treadmill. We seek pleasure, and novel experiences provide it, but then we adapt and the pleasure turns to comfort. We continue to seek pleasure, but now it takes another new thing to produce it, so we are always on the treadmill looking for the next “hit”.

Better Spending Decisions – The 5-Minute Solution

Budget Calculator
Budget Calculator – Create a Budget in Less Than 5 Minutes!

OK, so you’d like to get off the treadmill, but you still want to experience the pleasure, right?  This simple practice can help you make better

First, become mindful of your spending AND how much enjoyment it brings you. Just writing down what you spent helps you budget, but it doesn’t help you evaluate how your budget fits into your life.

Personal note: Those “write down everything you spend for 30 days” journal suggestions used to make me crazy! I hate!!! keeping records (you’ll hear me say that often). However, this way is relatively painless and it helps me learn more about what spending decisions are satisfying over the long term and which ones are not.

How to Implement These Budgeting Tips

Ourdebtfreelives’s website has a lot of great articles on creating a budget.  Regular bills don’t usually factor into your “joy index” unless you buy a new house or do something else unusual. For example, this week I bought a new cell phone and case, an exercise ball and a poster with exercises on it. I added those items to my spreadsheet, but not the regular monthly bills I paid.

Here are your columns:

  • item
  • category
  • amount
  • was it a need or a want?
  • Joy index – scale of 1 – 10
  • 1 mo. followup joy index
  • 3 mo. followup joy index (unless 1 month was 0)
  • 6 mo. followup joy index (unless 3 month was 0)

You can track this daily or weekly (I enter any new items daily, but only review once a month). If you wait longer than that it will probably seem like a bigger chore than it is. Over time, as you watch your satisfaction with each item decrease it becomes a little easier to remind yourself before you spend the money that the joy you experience from any given purchase is probably going to be short-lived.  Another way to increase savings is by increasing your income.  We have a great article on Sideline Business Models to get you that extra income.


Budgeting Tips – Final Thoughts

Give yourself time for this to make a difference in your spending decisions. Some of the research in this area used professors in the field as test subjects and they were no less prone to mis-predict pleasure or to adapt to it than others who were not familiar with the concept. If even the professionals fall for this, you shouldn’t get too down on yourself when it happens to you.

Curious if there is a way to reduce adaptation? Funny you should ask – keep reading to discover two simple practices that can reduce adaptation and get you enjoying your life more.

Retirement Myths You Should Know!

Retirement myths

Are you following the wrong directions for your retirement savings?  It’s time to get some of these retirement myths cleared up!

Back in the ’80’s my then-husband I were avid bicyclists. We lived in north Dallas and we used to ride north on Custer Road, out to a farm market road, east to what is now McDermott and then south on the service road of 75 back to Richardson. Preston Road was two lanes then and barely had a shoulder. There was a little country church where we used to sit and rest on the steps and when we got to the service road there was a McDonalds. It was in “the middle of nowhere”, apparently there for the travelers who couldn’t wait to get to Dallas to get a meal or a drink.

Imagine using my directions from the ’80’s to take that ride today. Custer is now 6 lanes. All the landmarks, including the church, are long gone. The farm to market road doesn’t allow bicycles anymore and it is also 6 lanes. The McDonald’s is still there, but now it is in the center of a busy retail area. Riding on the service road of 75 could only be considered suicidal.

Following directions from the ’80’s won’t get you where you want to go. Not on a bicycle, and not in your financial life, either.  Here is a great 401k calculator that allows your to create a number of different scenarios.  Now lets get to the retirement myths!

What’s the big myth about retirement savings?

Well, really, there are two.

  • Social Security will be there when you need it.
  • If your 401k balance equals a certain number when you retire, you’ll be OK.

What’s the problem?

Let’s look at some of the retirement myths:  #1 – Social Security will be there when you need it.

Surely you’ve heard that Social Security is in trouble. Just how much is up for debate and depends on a lot of assumptions. Without some intervention, the money is going to run out sometime within the next 15 years. Yes, there are bonds that are supposed to be “paid back” to continue to fund it, but that’s debatable, too.

To add to the risk, Social Security is at the whim of Congress. Everything about it – benefit amounts, qualifications for benefits, and other frules and regulations, can change.

In short, just because it has been there for years, doesn’t mean it always will be.

Retirement Myths:  #2 – A certain 401k balance guarantees a comfortable retirement

If you’ve had a financial advisor run projections about your 401k, you probably have a retirement savings balance you’re shooting for by the time you retire. Different gurus recommend different multiples of your current income to “guarantee” you won’t run out of money.  These retirement myths can leave you high and dry when it comes time to retire.

Here’s the problem – there are a LOT of assumptions in there that they don’t necessarily mention.

  • A rate of return has already been assumed before and after you retire
  • There’s a rate of withdrawal assumed, too
  • There’s an assumption about what your spending is going to be after you retire

That’s a lot of assumptions. The rate of return between now and retirement day doesn’t help you if the market crashes the week before you retire, taking your retirement funds with it. Even small variations in the rate of return will affect how long your money will last.

Why can’t we do something different?

Now we’ve covered some of the retirement myths we need to discuss what you can do going forward to be successful in saving for retirement.  Whether you’re anywhere near retirement or not, these two pillars of retirement “savings” have been the backbone of most people’s retirement plans for years now.

It’s a classic case of status quo bias and the anchoring effect.  The status quo is that you put $$ in your 401k and contribute to Social Security and everything will be OK. Any other approach looks crazy because “everyone knows this is how you do it”. And the number 65 has been anchored in your brain as the time you “quit working”. Once that number gets anchored, it’s hard to change.

What’s the Answer?

To get the right answer, you have to ask the right question. The right question is not “what worked in the past”, but “given today’s economic reality, what will work in the future?”.

Almost all retirement savings advice focuses on how much you need to save by the time you reach retirement so you don’t run out of money before you stop needing it. This is the wrong question. The RIGHT question is how much cash flow do you need throughout your life.

You don’t have to save a million dollars to have adequate cash flow in retirement. There are other ways to do it, and in today’s economy, they may even be more realistic.

Retirement Savings vs. Retirement Income

Phillip Brewer, in this article on Wise bread, argues that a return to financial solutions from the past is the answer to today’s economy. Specifically, he recommends investing in your own business. I totally agree with this, as this is a way to generate an income stream that doesn’t rely on the government or the stock market to secure your retirement income.

He also suggests that returning to the family as the primary economic unit is an appropriate response to current economic realities. Many millennial’s have already figured this out and are leaving home much later than their parents did.

Brewer points out that this model of the family business as the economic unit was the norm until less than a hundred years ago. THAT sort of redefines the status quo, doesn’t it?

What’s Next?

Assuming you have a job, and a 401k, and you’ve paid into Social Security, should you just ditch all that? Of course not!

Investing in your own business can be a supplement to all that. There are many businesses you can start on the side, and many smart people keep their business on the side. After all, there are benefits to the 401k and Social Security. There’s no need to throw the baby out with the bathwater.

Most people call this kind of business a sideline, but I like to call it a lifeline. Many people tell stories of how a side business kept them from financial disaster when they lost a job, became ill and were unable to work, or needed to take time off to care for a loved one.

I’ve put together a checklist for evaluating this kind of business and I’ll be happy to email it to you. Just put your email address in the form below and I’ll send it right over, along with semi-regular tips to help you make smart decisions about your money AND make them stick.