Most people hate budgeting because it is making a plan to deprive yourself. But there’s a way to tackle budgeting that will leave you feeling more satisfied. This is the surprising message from behavioural economist Dr Sarah Newcomb.
Newcomb says that, traditionally, budgeting involves listing your income and your expenses and subtracting your expenses from your income. The aim is for your expenses to be less than your income so that you have savings to invest.
The money comes from somewhere, and your task is to direct and manage it, to try to keep some of it for your security.
“It is a very powerless way to think about money, and you don’t have control.”
If you want to increase your savings, you must cut your expenses, which feels like a plan to deprive yourself, she says.
Behavioural economists often quote Maslow’s hierarchy of needs, a theory of human behaviour that says you first seek to meet certain basic needs, such as food, water, warmth, rest and security. Then you work to meet your need for belonging, love and esteem. Only once those needs have been met do you strive for self-actualisation (fulfilling your talents and potential).
Newcomb says most people do not know that Maslow was questioning his theory by the time he died, and today we know it is not true that we seek to satisfy our basic needs before we try to meet our emotional or spiritual needs. We constantly flip the hierarchy on its head, she says. For example, when you fast for religious reasons or text while driving, you are putting need for connection above the need for food or safety.
Newcomb says the problem with the way most of us budget is that we separate our needs from our wants. So we order our spending priorities in line with the hierarchy of needs, which results in us believing that only the needs at the bottom of the hierarchy warrant spending money on; everything else is optional.
But almost every one of your expenses meets a fundamental need, Newcomb says.
“You can survive without meaning, purpose, intimacy and social connection, but do you want to? These are the things that give our lives meaning,” she says. This is why we don’t like to budget: not satisfying the things we want makes us feel deprived.
“No wonder we don’t stick to these plans,” she says. “The numbers might work, but your life doesn’t.”
What you need is to find out why you want to spend money on something, Newcomb says. For example, if you go to a coffee shop every afternoon, why do you go? Is it because you want caffeine, or to connect with a colleague or the barista, or to see the city?
Trace the expense back to the need and find an alternative strategy to meet the need with the resources you have, Newcomb says.
It isn’t necessary to know the difference between a want and a need, but you must know the difference between a need and a strategy to meet a need, she says.
For example, you need transport, and a bus, a train and a car are all different strategies for meeting that need, but each one has a different price tag, she says.
Finding a way to meet all your needs within your available resources will make you feel satisfied, because it is not a diet, but a map of resources to match your needs.
Newcomb also suggests you consider your personal economy and how you can grow your own value. Behind every income stream is an asset: labour, land or capital. Your income comes from the combination of your assets – your labour, time, energy, intelligence – for which your employer is willing to pay. If you add experience and knowledge, such as a degree, you have skilled labour that will command a higher income.
Newcomb says when you think of your resources in terms of how they meet your income, you think about your personal economy with you at its centre. This is a more empowering way of thinking about your personal finances than chastising yourself for not meeting your personal budget.