When faced with the dilemma of going out for an elegant dinner with friends or living a “boring” life at home, most Americans will tend to choose the first option. However, what they don’t take into account is the substantial amount of income they will be taking out of pocket. So, are we supposed to have fun or sit down and budget our money? Well, why can’t we have both?
Budgeting is something we tend to shy away from. Even when we know that budgeting our income can contribute immensely to our financial well-being, we still choose to go in the opposite direction. Why? Well, the reality is that it’s just hard to do. Our brains are wired in such a way that we seek short-term happiness rather than thinking economically about our financial decisions.
Why don’t we just have mandatory financial literacy courses to improve knowledge of rational decision-making?
Financial literacy classes are one option to remedy these lazy temptations, but as behavioral scientist Wendy De La Rosa explains in her TED Talk, Americans spend $700 million on financial education, but these programs explained only 0.1% of variations in financial behavior. Everyone is different. The paradox behind people who are unwilling to work to make effective choices even when they might suffer the consequences is obvious. And the complexities that arise as a result of human nature setting aside “minor” issues need to be resolved.
So how to solve this problem? We can use a personalized approach to help budget our money for financial security with plans such as the Bank of America budget plan.
First, everyone should calculate their net income. Essentially, it is the total income people receive minus the amount they pay in taxes or any other mandatory expenses. Not only will this help build knowledge about how income is not as important for outside use, but it can also create an understanding that overspending of income is an important issue.
Next, we should track our expenses. Whether through the Notes app or using a custom app on the App Store, tracking spending habits is essential to life budgeting. If someone were to start going to the gym to build muscle, they could go there regularly. However, the effects will not be present unless they track the amount of weight they use for each exercise. Then they will make sure to use more weight the next time they go. Budgeting is similar to this because to maintain the habit and see the effects, tracking is essential.
Then there should be a plan set in stone for how people should spend money. A notorious but effective plan is the 50/30/20 to reign. Essentially, individuals should spend 50% of their net income on inelastic demands (the necessities). Examples include car and utility payments, rent or mortgages, and groceries.
Then they should spend 30% of their net income on their elastic demands (needs). Some examples include vacations, clothing/tech purchases, and spending on streaming services such as Netflix or HBO Max.
Finally, 20% of net income should go directly to savings or debt repayment. Strategic financial planning to save for the long term is necessary to be financially sound. Investing money in Roth-IRAs or 401Ks can help people reap the benefits in the future.
Finally, the last part of the plan, but the most difficult, is to adjust consumption habits. The reason this is the most difficult is because this is where the budgeting paradox comes in. Creating a perfect separation between wants and needs is something that varies beyond human knowledge, but rather our personalities. As writers Patrick Collinson and Sarah Coles of The Guardian In other words, having too many options makes it hard to choose.
Choices are at the root of this paradox in the world’s population. Thus, gradual steps should be taken to adapt to new spending habits that have been put in place, such as saving minute amounts of money and increasing them over time. Not only will this help with financial security, but it will also shape us for the better.