Psychology of Budgeting and Managing Our Finances

Interesting article from The Week highlights similarities between budgeting and getting into shape and how psychology often gets in the way of our goals.  Have your students read the article and commit to three actions they will take to manage their money more effectively given the knowledge they gained.

Key points:

  • Stress often derails our best intentions:

According to a study from Harvard Medical School, stress hormones push us to crave comfort foods — typically items high in sugar and fat — that actually send signals to the brain to shut down those problematic hormones. Likewise, spending money is a common activity that some people may use to deal with — or mask — anxiety.

As Hersh Shefrin, a behavioral finance pioneer and professor at Santa Clara University’s Leavey School of Business, explains it, our brains are actually fighting impulses to overeat or overspend all of the time — but introducing stress ups the ante.

There’s a psychological immune system to help us deal with these cravings and urges, he says. But when we are under stress, our emotional immune system is affected, and our ability to exercise self-control can be impaired.

  • Let automation be your friend:

Once you understand what makes you give into temptation, it’s time to layer on another important success tactic to help keep yourself from continuing those bad habits — automation. It’s a strategy Brad Hines, a 30-year-old productivity coach in Boston, has down cold for both his diet and financial priorities.  “With my finances, my credit card is set up to be paid in full automatically each month, and I use a monthly sum of money to automatically purchase an index fund with direct reinvestment,” Hines says.  Using this system, he not only maintains a zero balance on his credit card but he’s working on growing his portfolio at the same time. By continually — and automatically — investing in his future, setting money aside has become a guaranteed action for him.

  • Be sure to set reasonable long-term goals:

Translation: Setting unrealistic financial goals is one of the easiest — and fastest — ways to get knocked off track.

One way to define reasonable goals for yourself? Consider building some wiggle room into your get-fit action plan. It’s a strategy Lobel says can be “absolutely crucial” in order to help keep yourself motivated on the journey.  It’s precisely why Plotnick has started allocating a set amount of cash each month into envelopes for non-financial priorities like clothing ($100), hobbies ($100) and vacation savings ($200).  “With my new approach to financial fitness, I still do the things I love but with much more awareness,” she says. “And I don’t feel deprived at all.”