Finances: Winning against yourself

Sometimes the most difficult thing about getting your finances in order is battling your own presets. If you don’t budget your money (you should start now), overcoming that hurdle can feel tremendous. If you don’t have any savings, putting money in a new account might feel like you’re stealing from yourself.

Ramit Sethi, blogger and author of “I will teach you to be rich,” deals with the psychology of money — not just how to get it, how to save it and how to manage it, although he gives advice in those areas as well. But what really intrigues me is that he tries to challenge you about why you think the way you do and to correct those erroneous assumptions.

Here’s a snippet from Sethi’s post on automating finances (via Tim Ferriss’ blog).

Why do so many people believe that personal finance is only about willpower? The idea goes like this: “If I just try harder, I’ll start saving more, pay off my debt, stop spending all that money, keep a budget, learn about investing, start investing, rebalance ever year…” Unlikely. In fact, go ask your friends if they’re taking full advantage of their employer’s 401(k) match. The vast majority of people are not — even though it’s literally free money. Their answer? “Yeah…I really should do that…”

It’s not about willpower. More than anything else, the psychology of automation is critical to successfully getting control of your finances.

In one study, researchers found that making 401(k) accounts opt-out instead of opt-in — in other words, making employees automatically participate, although they could stop at any time — raised contribution rates from less than 40% to nearly 100%.

You can read the whole post for a slew of helpful information.

What one tiny thing could you automate in your finances in order to start saving more or spending less?

– By Lauren Davidson, Atlanta Bargain Hunter

See a great deal I should know about? Email me at ldavidson@ajc.com. You can also follow me on Facebook or on Twitter @atlbargains.

6 comments Add your comment

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JeninAtlanta

January 26th, 2011
11:40 am

Increase your planning window by reviewing what you spent last year and when. Each month I try to project my expenses for the next 3-6 months including putting money aside for unexpected things like gifts, car repairs/maintenance, home repairs/maintenance, entertainment, and etc.

Eric

January 26th, 2011
11:56 am

I started a budget 7 years ago with an Excel spreadsheet. I project out approximately 4 years at any given time. Even though the further out you go the less reliable the data is, it has allowed me to see the long term effects of spending today vs. saving for tomorrow. When I started with my budget I had considerable credit card debt, was renting and had no savings. In the last 7 years that has totally changed. I am credit card debt free, I own a home and have approximately 4 months worth of expenses in savings. Although I wouldn’t consider this financial security, it has totally changed the way I view money and has inspired me to continue down this path. At first I would look at my budget almost daily, logging expenses as I incurred them. But over time it has gotten easier. Now I spend approximately 15 minutes per week logging my expenses and scheduling bill payments through my online bank. I have basically automated my deposits through direct deposit and my bills are paid through online bill pay. I also make it my mission to make at least one decent sized deposit into my savings account each month.

But here is how I got started. I created my budget using realistic numbers, each and every time I spent a little less than I budgeted, I would automatically transfer the difference to my savings. So if I budgeted $100 for groceries for that week and spent $85…I would immediately transfer $15 to savings. It was by making those little steps that I learned to appreciate my growing savings account. Now my budget includes a line item for savings so that I automatically pay myself first. But let me tell you, when I started it became a challenge to go shopping and see how much I could save on groceries so I could put those little amounts in savings. Watching it grow from a few dollars to several thousand dollars just added fuel to the fire.

Since doing this, I have spoken to many of my friends about my success. At least 6 of my friends have asked me to set up similar budgets for them. All have thanked me over the years because it has had a similar effect on their finances. So starting small and working up is a great way to get started. Creating a realistic budget and sticking to it makes a huge difference. The thing that typically opens everyone’s eyes is that they can actually see the effect of spending $100 on clothes this weekend and how it has a ripple effect throughout your budget. It has helped me and my friends to set realistic priorities and reign in their spending.

Best of all, it’s easier than you think. Setting it up can take a little work, but then it’s easy to maintain as long as you spend a little time each week. The results are amazing and well worth the effort.

KDAWG

January 26th, 2011
12:03 pm

@ERIC….send me that spreadsheet please!

hp

January 26th, 2011
12:04 pm

Great post, Eric. There are few things that feel as good as getting your finances in order.

KDAWG

January 26th, 2011
12:08 pm