The Ultimate Budgeting Guide: Part I-Psychology of Budgeting

The Ultimate Budgeting Guide: Part I-Psychology of Budgeting

Yoooo, what up Wealth $eekers…

Hope all is well today!

So the other day I was listening to this podcast right (for the life of me I can’t remember the podcast or even who was speaking?). I know it was two young successful guys chatting about their businesses (it was some type of entrepreneur podcast). Anyway the interviewer asked the interviewee what he felt like he needed to work on…He said managing his money! Apparently he was making some 5 or 6 figures every month but still ran out of money by the end (and it wasn’t all going back into the business). I’m like doood? Really?? That stuff is so basic…

“One thing my pops always told me is you never count another man’s money. It’s what you’ve got and how you take care of it. And if I’m complaining about $44 million over four years, then I’ve got other issues in my life.” -Steph Curry.

Thanks two time MVP! Take care of what you got. I know, I know we don’t all make $44 mil but the goal is to be in that top 1% eventually right? How’s that going to happen if we can’t take care of the dollar$ we make now?

That being said here’s a 4 part series on managing the money you got. I recommend you take it seriously so you can be ahead of 70% of all millennials who don’t even have $1,000 in savings.

Part I: Where Do I Start?

Before you pick up a pen, make any calculations, open a spreadsheet, or look up a cool new budgeting app, you need to know, WHY. Why are you even thinking about managing your money? Why would you? Budgets suck, they really do. I mean, I guess there are a few nerds (flex) who actually enjoy calculating every cent but for the rest of us, it sucks having to track every little penny! Here are two examples on why you need to know why… 🙂

Scenario 1:

You come home from a long days work, you’re exhausted. There’s a few dishes in the sink, the floor could use a sweep, maybe a quick vacuum, there are a few articles of clothing left on the floor, not bad but definitely not spotless. What do you do? Make dinner and turn on Netflix? Yeah me too. The house is good enough.

Scenario 2:

Again you come home from a long day at work exhausted. Your house looks the same as before, but this time, your in-laws are coming over for dinner. What do you do? You’re probably going to do a quick clean up, amirite?


What’s the difference? Why would you clean up the house in the second scenario and leave it until later in the first? You had a reason, but not just a reason a reaaaally good one! Same with a budget, if you don’t have a really good reason for creating one, you’re not going to follow through with it. How many times have you said, “I’ll start my diet on Monday?” Like 1,000 times? Yeah, I have too! There isn’t a good enough reason to start one, but definitely a good enough reason to wait until next Monday (doughnuts, cake, ice cream, and brownies just to name a few). It’s the same with a budget, you write down all the numbers and see how much you can save, you get super pumped…Then the new iPhone comes out, or Kylie Jenner releases her new lipstick, or you “have to have those Jordan 1 Shadow’s (lit)”…or…or…or…and you end up spending to much.

I’ll get to picking your reason for managing your money in a minute, but first let me put on my Psychologist hat and ask you this question…Why do you overspend and why would you want to stop? Once you know why you want to stop overspending or why you even do it in the first place, you’ll know how to fix it, simple right?

Why do you overspend?

It usually comes down to one of these four reasons (according to science 🙂 of course).

1.) Simply put, we make 80% of our decisions with the emotional side of our brain (The Psychology of Money:Beyond Behavioral Finance; Cicily Maton & William Marty Martin-DePaul University). We’re impulse buyers. Think about it, when was the last time you went on a shopping spree, how’d you feel? Good. Right? Spending dolla bills feels good, especially in the moment when you get to buy all these cool “things.” Then what happens? You see someone with a bigger house, a better car, or a boat and YOU can’t afford any of those things. In that moment you don’t think about all of the small purchases you’ve made because, come on, that couldn’t possibly add up. I have news for you…they do…but when you don’t realize it, what happens? You go on another shopping spree to make yourself feel better…

2.) “Spent a couple of million on my new apartment…Down in Manhattan, that’s a multi-million dollar view…And I got it from rappin'” -Logic…we keep trying to keep up with the Jones’s (or in our case Kardashians or most any Rapper who’s made it). “We buy things we don’t need with money we don’t have to impress people we don’t like,” -Will Smith…We buy things we don’t need just so we look better than we actually are.

3.) You’re stressed. “As Hersh Shefrin, 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. (3 Ways Managing Your Money Is Like Getting In Shape, Natasha Burton).” We all have stress at some point in our lives so what do we do? Overeat or overspend.

4.) Status quo bias: This “shows that people do not change unless there is a perceived incentive to do so, (The Psychology of Money:Beyond Behavioral Finance; Cicily Maton & William Marty Martin-DePaul University).” Nobody is going to change unless they want to or have a really good reason to do so.


“Okay, great Mac, I’m stressed, I bought my car to impress my neighbors, and I’m an emotional wreck (insert your reason for overspending here)? Thanks for the break down homie.” So where do you go from here? I will say this, it’s hard to take the emotion out of money, so lets be honest, there is only one REAL way to do it…

It’s simple, you have a reason. If you don’t have a reason, I can almost guarantee you won’t stick with your budget, it might last a month or two but once the emotion takes over say good-bye budget. You have to own your reason, it’s like the endowment effect (this is why you read books guys, to learn this stuff).

Endowment Effect:

Researchers at Cornell University did an experiment with coffee mugs and chocolate bars. First, the researchers gave everyone participating a coffee mug. Then they offered to trade a chocolate bar for the mug. What do you think happened? The majority of them didn’t trade, they felt they were the “owners” of their original gift. Next, to a new set of participants, they gave chocolate bars. They then asked if the participants would trade the chocolate bars for new coffee mugs? You guessed it, the majority of them didn’t trade. Crazy right? When we own something, when we own an object, idea, thought, or goal, our brains are made to keep it (Vanessa Van Edwards).


So what do you do? You come up with the ULTIMATE reason to stick with your budget. The one thing in the whole world you want more than anything else and won’t stop until you get it. The one thing that you REALLY have to have. If we make 80% of our decisions with the emotional side of our brains use that to your advantage. Think about it, if more than anything in the whooole world you wanted to buy your dream home with a 20% down payment, when the new Jordan 32.5’s come out, are you gonna try n’ cop a pair? No (unless it’s in your budget of course). Why? Because you are so emotionally invested in purchasing your dream home that everything else seems like it’s in black and white. If your dream is to retire by 30 you are going to save and invest every penny until you can purchase your freedom. If all you want to do is pay off your student loans, credit card debt, and car payment so you are no longer living paycheck to paycheck, what are you going to do when the squad wants to go to Buffalo Wild Wings? Invite them to your place for a potluck dinner. Why? Because you are sick and tired of being sick and tired (and it’s cheaper). If you want to travel the world, budget for it. If you want a boat, that should be where your money is going, not eating at Wendy’s or McDonald’s. I hope the point has come across, find your ultimate reason to manage your money correctly.

How do you come up with your Ultimate Reason?

Find a quiet place. Bring a pen and paper. Before you write anything start thinking of these questions.

How do I want to spend my time?

What do I enjoy doing the most?

What do I dream about?

Where do I want to be in 5 years, 10 years, 25 years, etc.

How does my family tie into this?

What do I want out of life?

and lastly…How does money tie into all of this?

Now start making your list. List anything and everything, write down any and all reasons you have to create a budget. Any goals, wants, or desires. When you’re done, pick your top five. That is your list, the list of things that are the most important in your life. Now rank them in order from most important to least. If the #1 goal on your list doesn’t get you out of bed in the morning you’ve done it wrong and need to re-evaluate. Here’s the problem, if it isn’t the one thing you want more than anything in the world (get out of debt, dream home, boat, financial freedom, millionaire, travel, eat at fancy restaurants, etc.) you’ll keep buying “as seen on TV” items from Walgreens. You just will…because you don’t want it more than you want a freakin’ Snuggie.

When you’ve found your #1 reason, write it down. Write how long it will take to reach that goal. Post it on your mirror or next to your door, make a vision board (print out a picture of it), make sure you remember that goal everyday. Make sure you are inspired to do what it takes to reach that goal, even if it is keeping a budget and skipping out on the latest Nordstrom sale. If you do that, you’ll reach it and the quality of life you live will be enhanced because you are doing what you really want to do. You’re accomplishing real goals, spending your money on what you really want.

Conclusion:

Part 1 of the 4 part budgeting series, find your #1 ultimate reason to manage your money and create a budget. Part 2 is on which type of budget you should choose (yes there is more than one).

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