Start the New Year right. Skip the budgeting apps.

It’s a new year and that means throngs of well intending people flock to the latest web tool or mobile app to create a budget and track their progress.  You know what I’m talking about – Mint, Level Money, LearnVest, etc.  – we’ve all used them.  The problem is, the information they provide rarely translates to behavioral change.  And this can be maddening after signing up for a monthly subscription and spending hours creating what you feel is the “perfect” budget.

There’s no empirical evidence that having more information helps you make better decisions

One of the primary reasons this happens is because people are inherently overconfident.  So as we gather data – or in this context, as we categorize our expenses month after month – we feel as though we must be getting a better handle on our finances.  However, the reality as many of us already know, is that we’re just deceiving ourselves.  We rarely see any correlation between accumulating more data and making better decisions.  So we continue to overspend.

Dan Ariely tested this theory recently by conducting an experiment with more than 2,000 customers of a mobile money savings plan in Kenya.  However, instead of asking participants to track their expenses they were sent two text messages every week: one at the start of the week to remind them to save and another one at the end of the week to report a summary of savings.  And in the end participants only saved slightly more than non-participants despite the additional information they were provided.

Budgeting can be successful without expense tracking tools

The reality is that spending money is really easy and neither the physical act nor the information provided by categorizing expenses are likely to change our behavior.  So how can we successfully implement a budget if expense tracking doesn’t work?

  1. Place a Bet: Behavioral change is hard. If you’ve read this far you’ve no doubt tried and failed to implement a budget in the past. One thing that was probably missing previously though was a consequence.  Sure, spending too much is a consequence but I’m talking about tangible and immediate pain like when you lose a bet with a friend.  stickK, a company founded by Dean Karlan of Yale University fills this void.  It’s backed by academic research: participants see savings balances increase 81% more than non-participants.  Give it a try …
  2. Use Cash: If you’re having trouble living within your means consider using the envelope method. This requires that you create a budget and allocate a predetermined amount of cash into a physical envelope for each spending category at the beginning of the month. Or alternatively, you can simply put cash into one or two envelopes for spending categories that you might be struggling with like food and entertainment.  The way it works is decidedly low-tech, but it works because it creates physical friction for every transaction – meaning you physically feel and see the dollars coming out of the envelope when you spend.  At the end of the day, the more you think about your spending the better off you’ll be.
  3. Be Realistic: It’s all too tempting to let your exuberance get the best of you at the beginning at the year. Don’t we all have grand aspirations of a transformational change? However, ambition and reality don’t always play well together and when you attempt too much at once it’s usually counterproductive.  Not having adequate cash flow will just make you resentful after a short period of saying “no” to everything.  Dan Ariely describes depletion as “the idea that as we resist temptation we become tired. And as we become tired resisting temptation becomes more and more difficult.”  Are you tired of resisting temptation?
  4. Pay Yourself First: One of the best ways to implement change is to reduce decision inertia. In the context of budgeting, that means automating your savings contributions. Establishing an automated payroll debit into your investment account ensures you’re saving each month and keeps the additional income out of sight.  You’ll still need to create a budget to know how much can realistically be saved each month (see the previous bullet) but this is a great hack for those that are maintaining a budget but strive to do more this year.
  5. Work with a Financial Advisor: Seeking assistance from a professional, especially one that understands behavioral science, can help you break through barriers that may be holding you back. More specifically, an advisor can help you mitigate narrow decision framing (e.g. focusing on your cash flow without consideration for debt, risk, or financial objectives), educate you about cash flow planning best practices, and hold you accountable when it’s all too easy to shelve your fiscal ambitions until next year.

Evan Schmidt is a Vice President at Schmidt Financial Group, Inc. where he focuses on providing financial guidance to technologists with stock option wealth.

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