Handling Finances

In a recent post, Psychology Trumps Math in Finances, I discussed how as emotional creatures, we aren’t always capable of making the best financial decisions. Unless we learn to deeply value making decisions based on numbers and real statistics, we’ll simply make decisions that feel right — like when people refuse to fly for fear of crashing but drive to work daily, utterly ignoring the statistical realities of fatalities in transportation.

Sometimes, however, we can use our feelings to help us achieve our financial goals. PaidTwice recently published a blog post where she urges readers to make sure snowflakes stay snowflakes. The idea is that when you come across some extra savings or a little extra income, you should keep the extra out of your budget so it can be used as an addition to debt payments or to savings.

In math, this strategy has zero value. It neither increases your income, nor does it decrease your expenses. However, I think there a couple of key reasons that PaidTwice left unspoken which makes this strategy valuable for many of us.

1. Keeping extra savings or extra income ‘extra’ reduces the temptation to spend it. Some people struggle not to spend every dollar they touch and even after establishing a budget, if the budget says they’ll have an extra $20 a week, there’s a huge temptation to blow it rather than accelerating debt payments. Personally, I’d just increase my weekly allocation toward debt repayment, but that’s just because I’m a math geek. If you can help yourself to reach financial goals through keeping extra money out of the budget, go for it!

2. Extra money feels like a reward. Especially if you work hard for the extra money — perhaps with a part-time job or by carefully planning grocery lists — it can be extremely rewarding to keep this money separate. Every month, you can look at your budget and see your hard work paying off by reducing debt or increasing savings by more than you’d planned. Again, since I’m more comfortable with balance sheets than “naming each dollar” in a budget, this wouldn’t be very effective for me. This time, I’ll blame my nerdy parents who got me interested in reading profit/loss statements for companies my dad helped me buy in college.

3. It just works. With a zero-sum budget, you allocate all your income before it’s spent. PaidTwice makes the comment that if you eliminate the additional money in the future, you’ll still be working within the budget. She’s not strictly adhering to a zero-sum budget where she would allocate this extra income toward debt repayment and simply adjust the budget to have lower debt payments if the extra income dried up. But the important point is that it’s not a particular budgeting system that’s important but the results.

PaidTwice has found that tweaking her budgeting habits to fit her feelings results in faster debt repayment (her current major goal). Instead of giving in to her temptations and simply spending the extra money after it became regular, and instead of simply following the letter of a budgeting system that didn’t quite feel right, she built her own rules that made sense to her. It’s vital, when learning about budgeting and achieving financial goals, that we don’t try to force ourselves into uncomfortable molds. Keeping a budget takes time and effort, but the form of the budget and the goals at the end are entirely up to you. If you find budgeting to be more an annoyance than a useful tool, try to look at which details are causing the problem and simply do a little tailoring so the budget fits you like the worn-in sneakers you just can’t bear to throw away.

This entry was posted on Wednesday, February 27th, 2008 at 6:51 am and is filed under Debt, Saving. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.