TEXT OF INTERVIEW
TESS VIGELAND: If you have decided 2011 is the year to get your financial house in order, you’re in good company! A worldwide Reuters poll found seven out of every 10 resolutions this new year involved money and the management thereof. The primary tool for launching those resolutions would be, of course, a budget. But there’s one little problem.
Budgets rarely work for the long haul. Tara Siegel Bernard wrote about this recently in the New York Times. Welcome to the show.
TARA SIEGEL BERNARD: Thanks for having me.
VIGELAND: So like any good host of a personal finance show, I am supposed to say, ‘Everyone set up a budget.’ You say…
BERNARD: Don’t. In many cases, most people start out with the best of intentions and we want to set up a budget, we want to turn over a new leaf with the new year. But what happens is it turns out, oftentimes, like dieting. We set up too many restrictions for ourselves and not enough fun. So we end up binging later, consuming more calories or overspending. So it’s better to set up kind of some kind of broad guidelines and just become more conscious of our spending.
VIGELAND: Why is this so difficult for folks to follow through on? Is this one of those behavioral finance issues where our brains just don’t work on budgets?
BERNARD: In part. If you think about it, part of the reason a lot of spend too much is because we all whip out the credit card and there are no immediate consequences. There’s immediate gratification, but no immediate consequences until you get the bill 28 or 30 days later. Research suggests that when you’re actually paying with cashing and watching that pile of cash diminish over the course of a day or a week or a month, it’s actually more painful. So we’re more a little bit more mindful of our spending if we use cash as opposed to credit cards, debit cards.
VIGELAND: One of the things you talk about in your article is something called “mental accounting,” and that perhaps this would help folks more than actually sitting down and doing a spreadsheet budget. Tell us what that is and how that’s different.
BERNARD: Sure. Well mental accounting is when you divide your money into separate mental accounts that you treat differently. So think about if you get your paycheck every week, that’s hard-earned money and you’re going to be more careful with it. But if you suddenly won the lotto or were given a gift, you might be more likely to spend that on fun items. We tend to behave that way, so we can actually use it to our advantage. Say you have your basic checking account, or checking and savings that are linked, what you can do is set up sub-accounts. You know, if you have a budget of, say, $3,000 a month for your entire household spending — rent, mortgage, food, utilities — what you can do is break off, say, $300 or $400 or whatever you can afford for fun money and put that into a sub-account.
VIGELAND: But isn’t that just a budget by another name?
BERNARD: It is. And in fact, it’s all in the framing really. Several financial planners don’t use the word “budgeting.” That’s a dirty word. They prefer the more euphemistic “spending plan” because everybody wants to spend money, but nobody wants to budget and save. So it’s just another way.
VIGELAND: That’s like instead of dieting, you’re just going to eat right.
VIGELAND: So what’s the best way, if folks have decided that, OK, one of my New Year’s resolutions is I’m going to set up a budget, I’m going to stick to it. If we’re saying that you may be setting yourself up for failure, what’s a good first step for people to do outside of that?
BERNARD: Simplicity is key. And automating is key. You don’t want to automate to the degree where you become unconscious of, or completely lose track of where your money is going and your cable bill is inflating over time like mine did at the start of this year. But what you want to do is start backwards. Figure out what sort of savings goals that you have — whether it’s retirement, that vacation. Set up all those savings goals and then work with what’s left over. And then, once you’ve kind of gotten a better feel for where your money is going — which is another thing, you also want to kind of keep track for where your money is going for at least a short period of time so you could identify problem spots. But then, once you do identify those problem areas, just attack one or two of them. Maybe just say, ‘I’ll spend a little bit less on going out to eat this month.’
VIGELAND: OK. Excellent places to start for everyone. Tara Siegel Bernard writes for the “Your Money” section of the New York Times, and we’ve been talking about her recent article, “Why a Budget is Like a Diet — Ineffective.” Thanks so much for joining us.
BERNARD: Thank you.
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