Barbara O’Neill, Ph.D., CFP®
Extension Specialist in Financial Resource Management
Rutgers Cooperative Extension
Many articles have been written in the health field about “budgeting” calories as a way to lose weight. People can visit an online Calorie Calculator and get their recommended daily calorie “budget” based on factors such as age, gender, height, weight, and activity level.
Then it is up to individuals to “spend” their calories wisely throughout the day on meals and snacks and try not to exceed their “number.” Similarly, people make choices with the money they have available to spend.
Let’s go back to a calorie analogy. The basic principle to lose weight is to eat fewer calories than you burn. For example, if the calculator says you need 1,874 calories to maintain your weight, you’ll lose a pound a week if you consume 1,374. A financial equivalent example is earning $50,000, living on $46,000, and saving $4,000.
How do you live below your means? Many experts recommend starting with a detailed written or computerized budget with specific dollar amounts and categories. While this sounds great in theory, the reality is that only 32% of American households actually prepare a written budget or use budgeting software.
So what else works? Many people live on less than they earn by automating their savings. Commonly called “pay yourself first,” this strategy gives savings the high priority of a rent or secured loan payment. Savings gets deposited before people receive their take-home pay and they somehow learn how to live on less. Another strategy that works well for some people is personal “decision rules” that restrict their spending.
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 SuperSpeedway in Alabama have required drivers to use “restrictor plates” that limit the horsepower of their cars and slow them down.
To avoid overspending, people also need “restrictors” or cues that they’ve “had enough.” Not everyone will have the same restrictions, however. Rather, the amount that people spend relative to their income will vary. Looking for some specific ideas? Consider the following examples of personal financial restrictors:
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