Building a Budget

Budgets can be scary. It's hard to face those numbers. Still, once you have an automatic payment set up to savings each month-the most important part-I recommend getting a general idea of what your expenses are in different categories. It's important to be in control and have a general knowledge of your finances. But, as we discussed, it's best to start the process slowly.

Just to Illustrate:

Once upon a time, I used a complicated budgeting system. The technology was hard to use, and I needed to input every purchase. I found that there was too much friction, especially since it was a huge jump, coming from having no budget at all. All the behavioral odds were stacked against me.

Since it was so difficult, I put off taking care of it. Some months I managed to do it, then I missed a few months, then I started again. That's a clear sign that I wasn't following a behavior-based plan.

Your goal should be to make it automatic. Saving money should be as easy as possible.

The Fixed and Variable Expenses:

Start with your fixed expenses, such as rent, insurance, tuition, etc. This shouldn't take you more than a few minutes - all it requires is looking at your bills or your bank statement.

Once that's done, feel good about your accomplishment. It may seem small, but it's important. Also, according to B.J. Fogg, Stanford professor and leader in the study of behavior design, celebration is the best way to create a positive feeling that wires in your new habits.

Next, work on the variable expenses, the ones that vary from month to month. This doesn't mean you should start immediately. Do it when you feel ready to take the next step. It can be right away if you're all fired up, or it can be the next week. Remember, if you feel resistance, that's a sign that you're trying to move too fast.

Don't worry about the whole budget; establish each step on solid foundations of behavioral science. When you feel that you want to take the next step, do it, and start tiny. The good feeling about your progress and your general desire to improve in this area will allow your budget to grow naturally.

You can come up with a fairly accurate average by tracking your expenses over a few months. Food is the biggest expense that varies, so check at the end of the month how much you spent on groceries. It's about 20 minutes of work. Repeat for a few months until you have a general average. Then, move onto other variable expenses, like gas or clothing, over the next few months.

Don't pay attention to the tendency to rush. Take your time. Make it easy. Remember, we're going from no budget at all to gaining control of where your money goes, and a big change takes time.

If you jump into a full-fledged budget, it may work for some time, but you'll probably revert to having nothing eventually. Instead, go slowly so this new habit can become established and work long-term.

Then What?

A huge part of creating a budget is just having clarity on where your money is going. That gives you a feeling of control, and you may find yourself lowering your spending due to facing the numbers.

Then, you can actively make changes to your budget. You might choose to do that by calling your insurance agent to get a better rate or trying to lower your grocery bills.

When your income or expenses change, update these steps and repeat. You want to make sure that your numbers are current.

Other Options:

There are many different budgeting systems out there, and you can find the one that works for you. Any system that enables you to control where your money goes and pays you first is good. Use any method that works for you. Just make sure to use the principles of behavioral finance as your guide: make it as easy and quick as possible-automatic is even better-and start with tiny steps.