A lot of us rely on common sense and intuition when it comes to spending our money. It’s something we’ve been doing for so long that we don’t think it requires any special skills or preparation.
Here are three random reasons why you should change that.
It’s the sensible thing to do
Going out for nice meals, movies or nights in the city, traveling to that place that will make you enlightened, buying a car or ensuring a stable future for the family. These are goals we all set for ourselves in one way or another. Like it or not, a lot of them depend on money.
Yet, do we really think of these as goals? Do we really define them as a target and make a plan to reach them? Or is it more the case that we see others achieving these things and we simply try to follow their example?
With any result you want to get, your chances increase when you have a plan. And with any goal and plan you achieve one of two things. Either succeed, enjoy the result and gain self confidence or fail and learn. In either case you win more by having a plan than by acting on chance. That is why common sense should tell you not to leave financial goals to chance.
Cognitive biases that affect decision making
Relatively recent studies have shown how our decisions are influenced by cognitive biases. These are systematic flaws in our judgement that lead to wrong choices. For example, people are more likely to buy products that are purchased by other people in their group, by a lot of people in general or simply because they are exposed to those products in stores and commercials. The examples I just gave are known as the bandwagon effect, in-group bias and the mere exposure effect. They’re just a few from a long list of intensely studied biases.
It’s easy to see how such biases prevent us from reaching the financial results we want. To avoid the effect of cognitive biases it’s good to be aware of them and to make decisions based on concrete data. In the world of personal finance, the data you need is about your spending and your income. You then need a reference to compare the data against, in this case in the form of a budget and a plan attached to it.
In conclusion, planning your budget helps you stay on course towards your financial goals and even helps you reach them more efficiently.
And do you know who else is aware of cognitive biases? A lot of companies that make their marketing strategies around these biases. It’s known how web advertising works and how web ads are fine tuned to be as effective as possible. They achieve this effectiveness by targeting the biases we talked about earlier while at the same time gathering and analyzing data about you.
This creates an unequal playing field between you and companies who seek your money. Ultimately, what marketing does through attention engineering is to set goals for you. In other words, you might be working towards goals that were not entirely your choice.
This makes it all the more important to consciously set your own targets related to your budget. Adding timelines and a plan to them is a way to make your targets more reachable and to check your course against outside influences. While others capture and use your data to influence you, it is almost irresponsible not to analyze your own data yourself to level the playing field.
The three things above cover quite a wide range of reasons why you should be strategic about your budget. From external factors to internal biases built into the way we are and to simple common sense. If you were already being disciplined about your budget, I congratulate you. If not, I hope this was enough to convince you.
Try using MyRP as a platform for managing your budget and let me know what you think. Also, if you like these ideas or you would like to share your own on this topic, please leave a comment or share the page.