When faced with the dilemma of going out on an elegant dinner with friends or sitting at home living the “boring” life, most Americans will tend to choose the first option. However, what they do not take into account is the substantial amount of their income they will be taking out of their pockets. So, are we supposed to have fun or sit out and budget our money? Well, why can’t we have both?
Budgeting is something that we tend to stray away from. Even when we know that budgeting our income can immensely help our financial welfare, we still choose to go the opposite direction. Why? Well, the reality is that it is just difficult to do. Our brains are wired in such a way where we seek short-term happiness rather than thinking economically about our financial decisions.
Why don’t we just have mandatory financial literacy courses to enhance the knowledge of making rational decisions?
Financial literacy classes are an option to cure these lazy temptations, but as behavioral scientist Wendy De La Rosa explains in her TED Talk, Americans spend $700 million on financial education, but these programs explained only 0.1% of the variants in financial behaviors. Everyone is different. The paradox behind people not willing to put in the work to make effective choices even when they could suffer the consequences is evident. And the complexities that emerge due to the nature of humans putting “minor” issues to the side needs to be resolved.
So how do we solve this matter? We can use a personalized approach to help budget our money for financial security with such plans like the Bank of America Budget Plan.
First, everyone should calculate their net income. Essentially, this is the total income that people receive minus the amount that they pay in taxes or any other mandatory expenditures. Not only will this help acquire knowledge of how income is not as significant for outside use but it can also create an understanding that overspending the income is a significant issue.
Next, we should track our expenses. Whether it be through the Notes app or utilizing a personalized app on the App Store, tracking spending habits is essential to budgeting lives. If someone were to start going to the gym to build muscle, they can go consistently. However, the effects will not present unless they track how much weight they use for each exercise. Then, they will make sure to use more weight the next time they go. Budgeting is similar to this as in order to maintain the habit and see the effects, tracking is key.
Following, there should be a plan set in stone for how people should spend money. A notorious but effective plan is the 50/30/20 rule. Essentially, individuals should spend 50% of their net income on inelastic demands (the necessities). Examples include car and utility payments, rent or mortgages, and groceries.
Next, they should spend 30% of their net income on their elastic demands (wants). Some examples consist of vacations, shopping for clothes/technologies, and expenses for streaming services such as Netflix or HBO Max.
Lastly, 20% of net income should go straight to savings or to pay off debt. Financial planning strategically to save for the long-term is necessary to be financially sound. Investing money in Roth-IRAs or 401Ks can help people reap the benefits in the future.
Finally, the last but most difficult part of the plan is to adjust spending habits. The reason why this is the most difficult is because this is where the budgeting paradox comes into play. Creating a perfect split between wants and needs is something that varies beyond human knowledge, but rather our personalities. As writers Patrick Collinson and Sarah Coles of The Guardian put it, having too many options makes it difficult to make a choice.
Choices are what drives this paradox among the global population. So, there should be gradual steps taken to adjust to the new spending habits that have been implemented such as saving minute amounts of money and increasing it over time. Not only will this help financial security, but it will also shape ourselves for the better.