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All I Need is a Budget, Right?

Financial planning is more than just budgeting

I loved watching Star Trek as a kid. The strange new worlds, the perilous troubles Captain Kirk and his crew would get into, and Spock always there with a logical explanation on why they shouldn’t do the thing that will inevitably get them into trouble… I digress. This is supposed to be about why budgeting is difficult for many people.

What do Captain Kirk and Mr Spock have to do with budgeting? Well, Spock was ALWAYS in control of his emotions which meant his decisions were ALWAYS based on rational thinking - which is how economists thought people made decisions about money until the field of behavioural economics proved this wrong.

There are a few things happening that make it almost impossible to make purely rational decisions with respect to our finances. The one I will focus on today is habits.

Studies have shown that upwards of half our waking behaviour is habitual - if we had to make every single decision we would exhausted before we’ve even had our morning coffee. This is where habits come in.

These habitual decisions affect every area of life including how we manage our money. So, the real question is how can we work WITH our habits to create better outcomes?

  1. Create a vision - why are you working to shift your spending habits? If it’s to save for a vacation, create a vision of the vacation - where will you go, what will you do, who will you go with, how will it feel? Having this vision alone can help you increase your savings significantly.

  2. Examine your triggers - There are 5 types of triggers: emotion, time, location, other people, and immediately preceding action. Once you know the trigger, you can then acknowledge it and change the action that would normally follows. If you can be specific you’ll have a better chance of changing the behaviour.

  3. Create a System - This allows you to bypass the decision process. When saving for the vacation, create a separate savings account for it and set up automatic transfers to it. To be even more effective, place the account at a different bank because if it’s out of sight when you log into your usual bank, then it’s more likely to be out of mind.

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