A clinical psychologist with nearly 30 years of experience, Dr. Shapiro is ready to answer questions, offer advice and share strategies to help you alleviate the mental stresses of money management. Send your question to GoodCentsDr@gmail.com and it may be answered in an upcoming column!
Organizing the Chaos
When you think about it, money management is such a complicated task it’s almost overwhelming. Every day brings innumerable spending choices, as we confront the almost infinite variety of goods and services that can be purchased in our consumer society.
The overall goal is to align our spending with our income in such a way that some money is left over for saving, or at least debt reduction. This seems simple in principle but is confusing in practice, because there are so many decisions to make. How can we bring some kind of order to this chaos?
Spontaneous Decisions Don’t Work
With no overall plan, we make our spending decisions in a spontaneous way, making each choice as it comes up and hoping that, somehow, our spending won’t exceed our income. The one-decision-at-a-time approach results in a thought process like: “I really don’t feel like cooking tonight, and I’ll be driving right by that Chinese takeout place on the way home from work. I could get dinner for my family for about $40, which is not really a lot of money, so I’m going to do it.”
Of course $40 isn’t a big deal—by itself. But the question is, what whole is this spending a part of. If we do this type of takeout three times a week, that’s about $6,000 per year, and this amount of money could be a very big deal for a family trying to economize. So the question of whether it’s a good idea to get takeout today depends on how often we got it in the past and how often we will get it in the future.
If we make our spending decisions one at a time, there is a danger that each choice will seem reasonable in itself, but the sum total of the individual decisions might be unaffordable. When this happens, our credit card bills list a set of purchases that each seem okay, but the total at the top of the bill makes our stomach sink. It just adds up to too much!
Weaving Parts into Wholes
The solution to this problem is to organize our spending into categories and then set a spending limit for each chunk. This simplifies our financial lives enough so we can make a plan. Of course we can afford an occasional latte, but once a day or once a week? Of course we can buy new clothes from time to time, but would $75 a week make sense, or should that be $75 a month? This type of plan is called a budget.
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Making a budget presents us with a manageable number of questions that we can answer, such as how much money we should spend per month on takeout meals, clothing, entertainment, and so forth. Large, organized questions like these are answerable, while an endless series of individual decisions—should I buy this sweater, that bracelet, or this sushi special—cannot be answered in isolation from each other.
Decisions about spending in the present can be intelligent only if they are aware of spending in the past and planned spending in the future. This is how we can figure out the right amount of money to spend on the various areas of our lives.
A First Step toward a Budget
The way to make a plan is to think from the top down—from the general to the specific. Once you have budgeted a certain amount of money for a spending category, you are oriented; you have a frame of reference for making individual spending decisions. Now you have a basis for deciding whether or not to buy this latte or that sweater.
Making budgets can be complicated, too (although not as complicated as all our spending decisions made on their own). Future columns by your money doctor will explain how to simplify the budgeting process.
But I will offer my first suggestion right now: Pick one spending category, stroke your chin, decide how much money you can afford to spend on it per month, and commit to doing so starting on the first. One foolproof way to execute this plan is to put the appropriate amount of cash in an envelope labeled with your spending category. If this seems too labor-intensive, create a file in your phone for the category, and make sure to record each expenditure when you make it.
You do not need a comprehensive budget to start right-sizing your expenditures, and choosing one spending category to control is a good way to start. See how it goes!