The “knows” and the don’t knows
Knowing whether your pay cheque will last to the end of the month is an important part of personal finance. But even for those who do know if their money will last (as well as how it is spent), budgeting can throw up quirks and traps in the way we manage money.
Try a “reverse budget”
Traditional budgets typically require tracking of fixed and variable expenses – as detailed in How much should I be saving – and can be very effective.
However, they do not suit everyone.
eZonomics’ Six tips for starting a budget tells of different styles, including the use of new digital tools and a “reverse budget”, which involves setting aside a set proportion of income into saving and investments at the start of each month and spending the rest. Tip six is “don’t delay” – particularly important for cutting procrastination and getting the most from compound interest.
We’re all in this together
Even when we track our spending and make a budget, thinking tricks and traps can come into play and mess around with good intentions. One such trap is “mental accounting”, or the way people budget separately for food, shelter, transport and other expenses. Coined by Nudge co-author Richard Thaler, mental accounting explains how it is as if funds are put in separate buckets and can only be used for the set purpose. Such a thinking trap can mean if prices rise in one area, we cut back from that “bucket” while maintaining spending in other areas without question. Research on the topic is detailed in an earlier poll as is the suggestion to revise your budget as a whole if prices rise in one area to see if savings elsewhere can be made to help ease the pain.