Barbara O’Neill, Ph.D., CFP®
Distinguished Professor and Extension Financial Management Specialist Emeritus
Rutgers Cooperative Extension
One of the best ways to achieve personal goals is to set boundaries. In other words, draw a “line in the sand” and develop policies to say “no,” resist temptation, and stay on track. Boundaries can be set for many aspects of our lives including time use, spending and gifting money, eating habits, alcohol consumption, and ethics.
How do people set financial boundaries? Consider this analogy from the world of NASCAR Motor Sports. Ever since a car wreck nearly killed hundreds of spectators in the grandstands at Talladega in 1987, when a speeding car went airborne, races at Daytona International Speedway in Florida and Talladega Super Speedway in Alabama have required drivers to use “restrictor plates” to slow their cars down.
Like the Talladega racecars, many people also need “restrictors” (a.k.a., boundaries or “guardrails”) to slow themselves down so they can achieve their financial goals. In other words, cues to limit spending or reduce debt because they have “had enough.” Individuals need to develop, and enforce, their own personal finance boundaries. If someone tries to restrict another person, the “restricted” party will usually resent it and rebel.
Consider the following examples of personal finance restrictions:
- Spend no more than $500 on holiday gifts and parties.
- Charge no more than $200 per month on a credit card for new purchases.
- Spend no more than $100 a week at the supermarket.
- Buy a “new used” car, instead of a new car, to reduce the cost.
- Deposit 5% of gross income in a 401(k) or 403(b) plan via payroll deduction (to “restrict” your income)
Need some more ideas to set boundaries? Consider the following:
- Automate Your Finances- Put systems in place to direct money toward your goals. Examples include automatic bill paying and checking-to-savings account transfers, automatic purchases of stock or mutual fund shares, and contributions to a tax-deferred employer retirement savings plan. Do not use automated saving or bill-paying, however, if you have a volatile income and need the flexibility to juggle expenses.
- Set Personal Gifting Policies- Decide how you will handle requests for money from siblings, parents, adult children, and others. Will you “just say no” or is there a maximum dollar amount that you would consider on a case-by-case basis? Ditto for requests to cosign a loan or other requests to “rescue” people financially. Next, develop a statement to use, when needed, that firmly and politely explains your boundaries to others.
- Develop an Investment Policy Statement (IPS)- Prepare this document alone or with a financial advisor to describe your investing “guardrails.” Items to include are your investment objective(s), risk tolerance, and the maximum percentage weight of your portfolio to hold in different asset classes (e.g., stocks and bonds).
- Have an Accountability Partner- Find someone you can share your financial goals and boundaries with. A good accountability partner will hold you accountable to keep your commitments and stay within your boundaries and encourage you to carry on when you slip up and need a “do over.”