Episode 13: Budgets are for everyone

Oscarlyn Elder:

You might not always enjoy living within a budget. After all, who likes to say no to themselves when they spot something from their wish list that’s on sale? But budgets are necessary for everyone, no matter what your wealth level is. And as you’ll discover in this episode, budgets can be a powerful tool, but perhaps not in the way you would expect.

Budgets can not only help you reach your financial goals, but they can also tell you things about yourself and help you live out your values and purpose. I’m Oscarlyn Elder, co-chief investment officer for Truist Wealth, and this is I’ve Been Meaning To Do That, a podcast from Truist Wealth, a purpose-driven financial services company.

Thank you for joining us. In this episode, I’ll talk to behavioral researcher Perry Wright about why we create budgets, the role they play in our lives, and some tips for working within them.

Perry is from the Center for Advanced Hindsight and Common Sense Labs at Duke University, which applies behavioral science to improve the financial well-being of people across the country. They accomplish it by partnering with tech companies, banks, credit unions, nonprofits, and government organizations to design solutions that make us happier, healthier, and wealthier.

Truist partners with the Center for Advanced Hindsight to enlist, engage, and apply their expertise in financial and behavioral science and have been doing so for several years. Before we get started, if you want to take notes on today’s episode, we have a worksheet you can download and print. You can find it by selecting this episode at Truist.com/DoThat.

I’m very happy to be joined by Perry Wright, a senior behavioral researcher at the Center for Advanced Hindsight at Duke University. Perry has done a lot of research related to how we respond to and interact with budgets. And I’m excited to get his insights about this important aspect of personal finance.

Perry, welcome to the podcast.

Perry Wright:

Hello. Thanks for inviting me.

Oscarlyn Elder:

We’re so glad to have you here. And I understand that you didn’t have a conventional pathway to becoming a behavioral researcher. How did you end up at Duke doing this work?

Perry Wright:

That’s such a great question. I would say that the thread through it all has been that I’m somebody who’s pretty rigorously committed to pursuing my curiosities. I started in college doing a social sciences degree, which then led me to a graduate program to ask even bigger questions around theology and philosophy, asking sort of existential questions about our existence. And then I did the next logical thing after studying existentialism. I started a rock and roll band, where I got to live existentialism, sleeping on couches and surfing from place to place.

And I got to do that professionally. I was very fortunate to be able to get to do that professionally for a number of years. Along the way, I fell in love, and, in falling in love, I knew that I needed to not be out on the road as much as I was and to sort of change things up. So I took a job with a local arts nonprofit and was working on their database, because even as a cool rock star, I was really a nerd at heart.

I did that for about a year, about a year and a half, and then pivoted to working for, and then ultimately sort of running, a small boutique law firm that did a lot of policy and advocacy work around state-level infrastructure. We did heavy highway and various things like that. It was in that job that we had a project that incorporated behavioral science.

And I read Daniel Kahneman’s book “Thinking, Fast and Slow,” and that book gave me the bug. And so, pursuing curiosity like I always do, I started reading more, over time met one of the co-founders of the center here—Mariel Beasley—who is currently my boss, and said, what would I need to do to leave the law firm to work for you?

And she said, you really need to take these classes and read these books and do these things. And so I spent about two years’ worth of nights and weekends learning new things to become a behavioral researcher, on the side. After I did that and sort of had core competencies in that, I came back and I said, I’m ready.

And over time, a position did open up, and I’ve been with the center for about five years now—about four and a half years. So, it’s been great. It’s been a great journey. And it’s hard to track a single thread other than from thing to thing to thing, I’m always very interested in sort of deep questions about how the world interacts.

Oscarlyn Elder:

You know, Perry, it strikes me that within this podcast, where we talk a lot about purpose, right—we believe we’re really grounded within helping people discover, discuss, and live their purpose—how is your work connected to your purpose?

Perry Wright:

I would say that my purpose, if I were to try to distill it down, is that I want to be first and foremost, a peacemaker in the world. And I also want to be a problem solver, balancing the creativity necessary to make the world a better place with the humility that comes from understanding human behavior.

I study this, and so I understand the limits, but I also understand the ambition that it takes to try to be creative and provide solutions that ultimately do make the world a sort of more harmonious place. Not to be too Pollyanna about it, but I do want to see the world be a better place.

Oscarlyn Elder:

Thank you for sharing that. I definitely relate to some of the themes that you talk about in your personal purpose. And as we go through this discussion, I suspect your personal purpose is going to come through really clearly.

So, let’s kind of turn the conversation to budgets and creating budgets to help us avoid living, I think, beyond our means and to guide our spending—at least I think that’s why we create them. But I don’t think that’s the only purpose that a budget serves. Can you talk to me about that? How do you think about budgets?

Perry Wright:

I think you’ve said exactly what we hope budgets will do. I’ll start by saying that the most controversial thing that I’m going to say today is, despite the fact that everyone around us reinforces the need for budgets, they just don’t actually work that well for influencing how we spend money.

They do a lot of things, but the sort of chief goal that we have for them—influence how I spend money—is not actually what they’re best suited to do. I would put it this way: Budgets are the New Year’s resolution of our financial lives.

Just like New Year’s resolutions, they’re a little too optimistic. They don’t account for the time between when you’re deciding and when you’re doing. They are aspirational, which is great, but they don’t always hew to reality. And so, here at the center and in the broader research field, what we’ve seen is that study after study shows that there’s this disconnect between what jobs we’re hoping budgets will do for us, or what roles we’re hoping they’ll play for us, and what they actually do.

So, what I hope that we can spend our time together today talking through are, what are sort of the highest and best uses of budgets, and where can we not rely on, or then blame budgets for not serving us well in how we interact with our personal finances. So, that would be the first thing that I would say.

So, what do I then get for budgets, right? What do I get? They reduce the fungibility of money. That is to say, if I allocate money to a bunch of different ends, I’ve then limited what that money can do. You just said, like, if I have two competing things I would like to do with money, I need to sort of reserve or withhold some of that money to do one of them and reserve or withhold some of that money to do the other one.

That means that I’ve limited the buying power of money. I can’t go all-in on some great deal that I find, because I know that I have multiple goals to pursue. So, budgets are essentially saying upfront, I intend to show some constraint, to limit my buying power in some way in order to sort of pursue multiple competing financial goals for myself.

Oscarlyn Elder:

Over different time periods, right? I think that’s the other piece of how a budget could potentially help us, is distinguishing now between the intermediate term and the longer term.

Perry Wright:

Exactly. I think that’s exactly right. What I’d say is first and foremost, we should approach budgets as a diagnostic tool, not as an actual financial action in and of themselves. The act of sitting down and budgeting isn’t actually the same thing as taking a financial action in it.

It’s a diagnosis of what your financial situation is and what you hope to be doing with money. But that’s not the same thing as having done it. And so I would like to sort of circle us around, just for the sake of trying to make this a tight conversation, around three Vs for budgeting. That one, budgets make things visible for us; two, budgets are a reflection of our values; and three, budgets are the opportunity to counteract the volition problems we have around willpower and spending.

So, they make things visible, they reflect our values, and they give us an intervention point to take volition on things that we would have to have willpower to do.

Oscarlyn Elder:

So, let’s dig a little deeper into that first V of visible. There’s value to going through this exercise of developing a budget that goes beyond the dollars and cents, right? So, tell me about that.

Perry Wright:

Well, when I think about the concept of visibility, the first thing I’d say is, let’s think back to a time when, for example, your savings were visible. In an era in which you lived on tribal lands and the number of goats you had represented what wealth you had—the wealth you had was in front of you, in your field, inside your pens that you had built, right?

We now live in a world where our financial lives are a constellation of things that are visible and invisible. And we are actually at a disadvantage in that the things that are visible both to ourselves and to our neighbors around us are consumption behaviors. So, the things I spend money on and then acquire become the things that are visible to the outside world and to myself around me.

And the things that I save, for example, become invisible because they exist on balance sheets and in monthly statements. And those numbers go up and those numbers go down, but they aren’t the same thing as that sweater that I really liked and bought the other day. And so what a budget can do is it can make visible back to me the trade-offs that I’m making in my spending. Where am I spending things toward goal one, goal two, the things that I would like to give myself to enjoy life. I don’t think budgets, you know—I do think that we often think of budgets as a constraining tool. But budgets are also a way to build for yourself a road map of spending to the things you actually want to spend, right, in this kind of acquire and spend out, acquire and spend out model, that we need to have because most of us do not earn enough income to do every single thing we want to do within every single pay cycle, right? We have this push-pull thing.

So, budgets make those things visible. The hidden and secret things that we’re trying to do, like save, it makes them visible to us, in front of us, as we’re looking at them.

We are also very insensitive to the scope of our sort of expenses and the way we spend money, the way we interact with money. We’re very insensitive to the breadth of that scope. What a budget can do is put back in front of you visibly that full scope, right. So, if we think about things like monthly expenses versus quarterly expenses that our households encounter, or annual expenses that our households, a budget can reflect that back to us and make visible to us the things we can’t keep in our mind all the time, keep back the things that we can’t keep—

Oscarlyn Elder:

That we forget about, right?

Perry Wright:

And we forget. Exactly.

Oscarlyn Elder:

We forget that we might have an insurance, I don’t—we might have an umbrella insurance policy that’s due semiannually or annually, for instance. We might forget about something.

Perry Wright:

That’s exactly right. And that tool, we knew when we bought it, when we originated that policy, we knew that that tool was going to increase our resiliency in some way. We knew that it had value to us, but its value is essentially in being a seed that’s been planted in the ground and forgotten about because we don’t interact with it regularly.

And so a budget puts back to us that it exists. And we can then sort of value it as, one, it’s a reflection of a value that we had and that we’ve made progress toward some kind of goal. But it also just lets us keep track of it, lets us understand that it’s part of our overall financial picture.

So, I had a teacher in high school who said to me all the time, because I was young and arrogant and bright and would never write things down, and he said to me, a dull pencil is better than a sharp mind, right. The idea in his mind was, you’re only going to be 17 and smart for a very short time in your life. And over time, you will forget many, many things.

And what a budget can do is it can function like that dull pencil. It can function like that thing that is a true record of what’s going on in your financial lives in a way that doesn’t allow you to create your own fictions about how you’ve spent money or what you’ve done or, or to lose track of those things. It really can be a sobering and inspiring look at what we’ve done with our money, right? It can be a great opportunity for feeling that sense of integrity also about where all the places our money is going.

Oscarlyn Elder:

And that really the thought of developing the budget, writing it down—in episode number 12, I was able to speak with Dr. Ayelet Fishbach, and she really talked about the power of writing your goals down and that by writing your goals down, it makes you more mindful of them.

And I believe this really aligns with that same thought, that there is power in simply writing down the budget. It’s an accountability tool, right. You’re writing it, you’re making some type of commitment to actually put it on paper. And just that very act, I think, what you’re saying is that increases the mindfulness, you know, around what that budget’s reflecting.

Perry Wright:

It both increases the mindfulness and it also reduces the need for the mindfulness because it exists outside of your mind. I think that’s such a great point about writing down goals. I would also say, remember that one of the challenges specifically around something like budgeting is that when we write it down, it can feel like we’ve taken an action. But remember, I’m going to say it again and again, budgeting is not actually a financial action, right.

Oscarlyn Elder:

It’s not the outcome. It is a tool to help guide us toward the outcome, if you will.

Perry Wright:

That’s right. The other thing I would say about this is that if you are writing down a budget for, say, the first time in many years, or you’ve lost track of the scope of where all of your assets and money and debts are, and you go to do that for the first time. We actually ran a study in which the exercise of budgeting—we had a control condition, we had a simplified budget, and we had a complex budget.

We had people in the control condition. They simply read an article about budgeting. In the condition one, they did a simple budgeting exercise. And condition two, they did a more complex budgeting exercise. They went through the exercise and came up with a budget and did these things. And before they made this budget, we asked them, how confident are you in your financial situation? How do you feel about your ability to handle things and understand where your money is and do these things? And they reported a number.

And then we had them do this budgeting exercise. And then we asked them again, how confident do you feel about your money and the things that you have? We hypothesized that the act of budgeting would make people more confident. But what I want to tell you, and this is what I think is really important for listeners, is the act of budgeting decreased their confidence in understanding all of the dynamics of their financial lives. It decreased their confidence.

Now, why? Because it revealed back to them how many things they weren’t keeping track of. How much was going on, how much more complex their financial lives were than the things that they had. When they weren’t thinking about it deeply, they had high confidence.

Do you know the only group that increased confidence in our experiment after they had done their thing? The people who simply read an article about budgeting felt even more confident about their financial lives, right. So, I want to say for all of us listening here, that when you sit down to do this, if it’s been a while, don’t beat yourself up if the first thing that happens is you suddenly realize that you have not been as on top of things as you have sort of felt like in your daily life.

Oscarlyn Elder:

Prepare to be overwhelmed, potentially. You’re saying, like, mentally get into a place where you know you may get overwhelmed and that’s completely normal, because you’re likely to be faced with some information that you just haven’t surfaced in a long time, that you’ve probably pushed to the back of your mind.

Perry Wright:

Precisely. That’s exactly right. The idea is, we often, in many areas of our lives, we use these things called mental heuristics, which are that our brain cannot keep track of everything at a deep, deliberative level all at the same time, all at once. And so what we do is we tend to chunk complex things into more simple things that we can keep track of in our mind.

And every time we sort of crack open one of these simplified buckets of knowledge, it breaks open a much more complex situation for us, and that can be very intimidating, So, one of the things about visibility that I want to say is, it’s a huge value to you to understand what is and not simply what you believe to be.

That’s a huge value, but two, recognize that along with that, you are going to have something reflected to you that might make you feel anxious that you didn’t quite have it all together like you thought you did. And that is not a problem, right. That’s why budgets are a good diagnostic tool, is they’re going to surface that back to you in a way that you now have some reckoning to do with them.

Oscarlyn Elder:

So within that, are people good at developing budgets? So, we’ve kind of talked about the visibility that a budget brings and that you’ve now noted the research that when folks start working with a budget initially, they can become overwhelmed on some level. But as they start forecasting out their expected income and spending, how good are we at doing that?

Perry Wright:

That’s a great question. The answer is not very good, unfortunately. That doesn’t mean that everybody, it doesn’t mean that there aren’t people who are very good at budgeting. Those people tend to treat budgeting more like an accountant would treat a ledger. But generally speaking, when it comes to sort of categorization, we as a people are not that great. And that’s across income spectra. That is, we’re just not that great.

The big, number one thing is that we tend to be too optimistic. So, we ran a large field study with a financial platform. And we had a condition where people, we simply tracked what they spent in a month. We had a condition where people, again, made a sort of simplified budget for what they’d like to spend in a month. We had a condition where they made a more complex or itemized budget about what they’d like to spend in a month.

And this is very interesting. So, in this financial app, we saw no difference in the spending between these three groups. There was no difference. The people who did a really complex budget with lots of items in it, they didn’t spend less or more than anybody else. The people who had a sort of simple budget, they didn’t spend less or more than anybody else. And the people who had no budget, didn’t even know we were tracking what they were spending, didn’t spend any more or less than anybody else.

But it was very interesting because the budgeting exercises for both of the two budgets increased their engagement with the app. They looked at it more. They were checking in on their budget and spending, like the way that their budget and spending related to each other, all along the way. And yet it didn’t actually change what the total spend was over the experiment.

And I think that this is for a few different reasons. One, we’ve talked about how budgets can feel like a financial action on their own, when in reality they’re simply a tool that we would use to help us make sense of our financial life. The other thing is related to another lab study we ran in which we gave people simply a list of the expenses that they had done and then told them either they had overspent, they were right on budget, or they had underspent. Or we gave them a list of their expenses and the categories of those expenses, and we told them they were overspending, they were right on their money, or they were underspent.

We asked them—we gave them what we call a temptation goods option, which was to order takeout or eat groceries they already had in the house. And the people who had the categorized budget actually were more likely to do the temptation good—they were more likely to order out because they had these categories and the categories gave them a sense of other places, other little pockets, they could pull money from to, like, make it right in the future.

Oscarlyn Elder:

Interesting. The opportunity choices were made more clear to them.

Perry Wright:

That’s right. So, it both gave them a visible sense of where their resources were, that they could pull from to do this thing they wanted to do now, and it also seems to have reminded them that there were places that they could get other money from if they needed to, other budget categories they could get money from if they needed to.

So, I would say that when we think about this sort of optimism in our budgets, I think about the work of, Chuck Howard is a great researcher on this. He’s got work that demonstrates that yes, we are overly optimistic in what we do when we make a budget, but it has this sort of elasticizing effect that we’re overly optimistic, we blow past what we budgeted, but we don’t blow past it by as much as we would have had we not done the budget.

And I’m pretty compelled by this. I will tell you that in our financial app field experiment I was just describing, we didn’t see that. Everybody overspent by about 1.4 times what they had budgeted, and that was across all the conditions, it was between 1.3 and 1.4 times.

So, we didn’t actually see that elasticizing effect, but he has done a different structure and I have no reason to doubt that. I think he’s got a good study that shows that it does, sort of, like, draw you back toward what you had budgeted, but you still, in a sort of, like, binary sense—a sort of yes-no sense—you blow past what you expected to do in your spending for all of these reasons.

Oscarlyn Elder:

So, kind of the bottom line is from the academic research, then, we tend to be overly optimistic when establishing a budget, establishing those guidelines. But the research shows us that on some level, the act of creating the budget helps us to perhaps blow by it less, to have less of an overage. So, there’s value there in making it visible.

And I also heard you talk about the categories and, you know, as we kind of bring this part of our discussion to a close around the visibility aspect of a budget, are there tips that you would have, like, in the actual construction of the budget, you know, to help it be a more useful diagnostic tool for our listeners?

Perry Wright:

Yes. So, the only other thing that I’d like to add from the research is about the time component, is the distance of time between when we make the budget and when we’re doing the spending. This is what researcher Christina Kan refers to as budget depreciation. That is, the value of the budget goes down over time, the longer it is between when you make the budget and when you’re making a purchase.

Oscarlyn Elder:

Yes. And that coincides again with Dr. Fishbach’s work, which talks about, you know, long middles are bad. We don’t want long middles. Like, we need to have shorter middles, kind of, shorter timeframes to be able to drive behavior, ultimately, to be motivated to achieve our goal.

Perry Wright:

That’s exactly right. So, when it comes to this sort of visibility thing, the most important thing I would say is, remember that 30 days of your life is arbitrary and that 365 days is a much better reflection of what you actually do in a year, because we do have seasonal spending because of cultural things and things that we love in our family and people that we love that we buy gifts for and have holiday seasons and birthdays and things.

Oscarlyn Elder:

And insurances and subscriptions and you’re talking about the spending that we do to support our families and our chosen family, if you will. But there are also, kind of, just these mechanisms that certain commitments we have show up every year or six months.

Perry Wright:

So, it doesn’t serve you as well to look over the last 30 days. It serves you much better to look over the last year, even if all you’re doing is scanning the last year for these kind of one-off, uncommon but recurring things, right.

Oscarlyn Elder:

So, the look-back period needs to be at least a year so that you’re capturing as many of those one-time, nonmonthly types of expenses. So, scan a whole year and then when you’re actually crafting the budget, do you think we should do that on a monthly—attempt it on a monthly basis, so that we have that shorter middle that we’re going to?

Perry Wright:

So, it’s a great question. What I recommend that people do around this in the visibility piece specifically, what I recommend that people do is, as they’ve done this, don’t overcategorize what is being made visible to you. Keep those buckets, keep those categories, more broad. Because, especially at first, the more categories that you give yourself, the more places you’re going to believe you have, like, money to pull from if you want to overspend.

Oscarlyn Elder:

OK. So, broader categories so that in essence you’re making it a little bit easier for your mind, if you will. You’re not playing the trick of, well, this is groceries, this is dining out, this is—you’re making it easier for your mind to make those decisions and then to really hold yourself accountable, I think is what you’re saying.

Perry Wright:

Yes. I think that’s exactly right because by having some simplified categories, not overly granular categories, I can now develop for myself and my spending habits, rules of thumb, OK. And those rules of thumb that I can have—you just mentioned groceries versus dining out, it’s a really great example—I can build myself a simplified rule of thumb for a number of times that I’d like to eat out, and that’s something that on a weekly basis I can keep track of. How many times have I eaten out this week? I might not even remember this month, but I can remember this week.

Oscarlyn Elder:

That’s a short middle. I’m going to go back to that.

Perry Wright:

That’s right. That’s the short middle.

That’s exactly right. And so what I want, again, the number one thing I want people to think about when they think about budgeting—I’m a behavioral scientist, so you’re, of course, you’re going to hear this from me—is think about how this thing reflects to you the ways you behave more than anything else.

What are the actions you’re taking, right? We’re going to talk about values in a second, because that was my second V. But how are you acting? And what is this telling you about how you’re acting? How is this being made visible to you? What does it say? And so the first thing I’d say is, think about ways to simplify those rules of thumb.

And I would also say, think about—we just talked about budget depreciation. Think about that sort of shortening the middle, right. So, we want to say, if I build a rule of thumb for myself, is it a rule of thumb I can keep track of? Does it operate at a high enough level that I can sort of keep track of it on some cadence that makes sense?

That’s the thing, because as soon as I make it too granular, as soon as I give myself lots of places to pull money from to solve the other things I want to do, we’re going to want to always consume the other stuff for all the social reasons we talk about. It’s more visible, it shows people our wealth, it signals whatever, we always want to consume more than we want to, say, save or work toward some other larger financial goal that takes a long time. So, we can help ourselves out by giving ourselves some simplified rules of thumb for what to do.

Oscarlyn Elder:

Let’s arc for a minute and talk about the values piece. We’ve talked a lot about the visibility. What lessons can we take away from our spending? Like, how can the budget help us understand and/or live our values more intentionally?

Perry Wright:

I really think that that is one of the best roles of a budget, right. So, the first thing that is done in the act of making our financial lives visible to us is, it’s going to reveal to us where our current values are, right. It’s going to show us, where is our money going right now?

And if it’s not how I see myself, what actions do I need to take to change that? So, ask yourself, when you look at this sober account of where your money has gone and you start to develop a model for where you’d like it to be going, first, ask yourself, does this reflect my values? Does this map onto my sense of what my legacy will be? Does this map onto what my charitable life looks like? Does this map onto what my savings goals look like? Am I setting myself up to make the real estate move that I’d like to make as I’m aging?

These are the kinds of things that, they don’t happen in 30 days. They happen over long periods. And so what is the story that this money is saying about me? And if it’s not the one that I also see about myself, what are the specific things I would need to change to make it look more like that, right? What are the specific things I’d need to do?

Am I invested in the funds that I support? Am I invested in places where I think that I am doing the best version of me in the market? You know, those are the kinds of things that really can help us live our financial lives with the kind of integrity in how we see ourselves.

Oscarlyn Elder:

And I’m going to tie it back to the conversation that we had in Episode 12, which we had a discussion about thinking about your future self, connecting to your future self. And I hear a lot of that in what you’re talking about. What will my legacy be? You know, am I a saver? Am I a spender? What is that vision of the future person that I want to become? And having that in mind and then using the budget as a tool to determine, ultimately, if your behavior is moving you in that direction.

Perry Wright:

Yeah, that’s right. So, you have to look at a budget as a reflection of a bunch of actions you’ve taken, right. Some of those actions are automatic that you set up to happen. Some of those actions are the day-by-day expenditures on various things. Some of those actions are simply where you’ve parked money.

But those are all reflections of things you’ve done in the world, right. And so if you start to look at a budget as a sort of story of a set of actions, and you ask yourself, what would the different actions I would need to take to tell me a different story, then you can start to use it, again, as a diagnostic tool for the future of your money.

And the nice thing about a budget—one of its problems, but one of the nice things—is that it is designed to think more long term than we are inclined to think on our own. We tend to be what we refer to in behavioral science as present-biased. We are often seeking things that are temporally present in front of us and also typically things that are satisfying in hedonic ways, so, instead of, say, functional ways.

So, a great example of something that is where you have a long-term kind of thing that runs the risk of not being very satisfying being incorporated with having a sort of hedonic component is if you think about something like minty toothpaste, right. Brushing your teeth every day, it’s really important for dental health, but the daily action of brushing your teeth is not a very satisfying action. But if I make the taste of the toothpaste minty, now, all of a sudden, it’s not as bad. I’ve bundled with this kind of long-term, unrewarding, functional action—brushing my teeth every day—I’ve bundled with it some kind of small, hedonic, little jolt of reward to what I do.

Well, what a budget can do is give you a sense of what those actions are that are long term, and you can build for yourself a sense of what are the things I could be doing now that would be satisfying to me but also be aggregating toward this longer-term set of financial goals.

Oscarlyn Elder:

Perry, let’s take a second and talk about the third V, right. Let’s talk specifically about the volition piece of your three V equation. Unpack that for us. What does that mean?

Perry Wright:

Sure. I think it’s a great question. So, one, volition is not a word that we use very often. I used it because it’s a V and I had already had two Vs.

Oscarlyn Elder:

Fair. That’s fair enough. Researchers like frameworks, and frameworks that are catchy. But I do want us to unpack that word and kind of get into what’s the heart of the advice there.

Perry Wright:

Great. So, we’ve already established that the research shows us that our willpower around spending is not influenced by a budget.

Oscarlyn Elder:

And that we’re actually not really good at estimating.

Perry Wright:

That’s—I’m not sure that I’ve even said yet. There is an overarching insight around this is, what it gets bundled in, called budget fallacy. Budget fallacy is that we are both bad at predicting what we will spend, and we’re even bad at estimating what we just spent over the…

Oscarlyn Elder:

So we’re flawed. We are naturally flawed at the budgeting exercise. So given all of that, and you said, hey, we’re going to use it as a diagnostic tool.

Perry Wright:

That’s right. The volition piece here is that the budget, in both making visible to us the reality of our spending life and giving us a measure by which to understand our values that we want to have about our financial lives, the volition piece is the act of budgeting becomes a moment in which we can take actual financial actions in a lot of domains.

So, let’s use, for example, let’s say I would like to be saving more for some specific goal. If I look at my budget and I see that I am not saving for that goal, or I’m undersaving for that goal, the time that I make the budget and have done this assessment is the exact time that I should now go into my banking app, and through their robust online platform, set up an automatic transfer on some cadence that makes sense within the budget I’ve just looked at, right.

So, having reflected back to me what I’m actually doing, seeing that I have a change in the thing that reflects the value I want to be, this is when I now take an action. Now, this is the first time that I’ve actually taken a financial action. Getting the budget together, looking at the stuff, none of that’s actually taking an action, right.

Remember, that’s all diagnosis. Now, the first action that I’ve taken is, I’ve logged in and I’ve changed some kind of automatic transfer toward a goal that I have. And I also know, because I’ve looked at the full picture of things, my income month by month, and what I’m generally spending month by month—I have a pretty good sense now, because I’ve had this sober, visible look and I’ve compared it to my values—I have a sense of what I can actually do here that’s within the constraints that I have, right. I can now rebalance the money going in and going out toward this better end that I have, which was the purpose of the budget in the first place, right.

So, I’m going in, I’m logging in, I’m setting up this thing. This is what we refer to as automaticity. Automaticity is simply saying, I’m not going to remember to do this month after month after month. I’m actually going to rely on a computer to do that for me. Computers are really good at remembering to do simple functions over and over and over again.

In this case, the simple function is move $250 from this account to this account, because I have a goal of having saved some amount of money for this aim. That’s a financial action that I’ve taken. Another financial action I might take as I review my budget, compare it against my values, I might decide to structurally partition some money.

So, we talked earlier about the sort of pitfalls of categorization, of overcategorization in budgets. This is kind of the flip side of that, which is that there is a lot of value in structurally partitioning money for certain identified ends. So, if I physically move money from one aggregated account into two disaggregated accounts and give them both named functions, research shows that I’m actually less inclined to go in and rob from one of those accounts to a competing end that that account wasn’t partitioned for.

Oscarlyn Elder:

And so does that look like, for instance—if we were talking about spending, you might have an account that’s for nondiscretionary spending, right. Your required bills that you have to pay for housing and food and, you know, all of the essentials. And then perhaps a separate account for discretionary spending that you have that’s accessible.

And then I think the other partition, if you will, or bucket that we certainly have a structural support for is around retirement, right. So, folks have 401(k)s, there are IRAs. That’s a partitioned account for a specific purpose, specific to retirement. We also have education 529 accounts, which that’s another partitioned account with a specific purpose.

I’m just wondering, in addition to those types, which are very commonly thought of, like, in the day-to-day management of your household, I think what I hear you saying is that it may make sense to partition your spending accounts—not so much the ones that are oriented just toward savings and investing, but that there could be value in the spending accounts to partition there as well.

Perry Wright:

I think that’s exactly right. As an example, let me give you a simple rule of thumb. Let’s say that you look at your budget and you map it all out and you see kind of where this money’s going.

One simple rule of thumb that you should use as you assess this thing, not only your values, but also just general sort of financial resiliency rules of thumb, is that about half of your money should be going toward things that recur, right. These are fixed recurring expenses. They have standard deviations, right. My electricity bill, my utilities, they go up and down within an order of magnitude month after month. Some months it’s cold, so I use more heat. Some months it’s warm, so I use more air conditioning. But they operate on predictable patterns, right?

I want that money set into one mental bucket. Then, I have things that I have to make choices about. I want about 30% of my money to be in that. About 30% of my total income I want to put into discretionary spending. That’s, and we say discretionary—discretionary is actually kind of a complicated idea, because if you take, for example, food, I can go to the grocery store—that we keep using the example of the grocery store versus eating at a restaurant—I can go to the grocery store and I can spend $300 on food that will feed my family for two weeks, or I can go to a restaurant and spend $300 on four dinners, right.

So those are both food, right. And I had discretion in both of those purchase domains. But the difference is, can we set up predictable models? Say, you could put your grocery shopping, generally speaking, in a more structured, in your fixed expense bucket, and then partition out the choice-based food of restaurants, right, put that in your discretionary space. And again, I’ve already encouraged you, think about eating out as a number of times of eating out, not an amount of money of eating out. Just because it’s—there’s just too much noise there. So about 50% for these fixed expenses, about 30% for these choice-based things.

And then this is crazy when we look at America, because this is not what we see, but about 20% should be moving toward your long-term goals. So, it should be in savings, being paid toward your insurance policies, different things like that, that are creating financial resiliency for your family. These are the stopgaps to financial shocks. These are the ways that you’re going to handle unforeseen things. These are the ways you’re going to accomplish longer-term goals, right.

So, as I’m looking at the money that I’m putting out into the world, about 20% of my total money should be going toward these kind of longer-term, resiliency-building instruments. That’s my simple rule of thumb for what to do, and at the bare minimum, I’d want to partition into sort of those three buckets.

Oscarlyn Elder:

That’s really helpful. But I want to highlight that again. So, you’re saying about 50% should go into fixed, more predictable, and that’s one partition, one bucket. I like the word bucket, because I think in buckets. And then 30% kind of in that choice bucket. And then 20% really should be dedicated toward building that financial resiliency.

Perry Wright:

Yep. So, it’s going to include savings and maybe other policies that you have that you’re, that are sort of…

Oscarlyn Elder:

Risk. Right. So, savings, risk mitigation, and then also those really long-term goals around retirement and perhaps even education funding I would assume might fit in there.

Perry Wright:

It can even be like, “trip to Italy” can be in the savings bucket. It’s a longer-term thing that builds resiliency for what I want to be doing, right. This other stuff is getting burned, that 80% we started with is getting burned every 30 days in most cases. That’s our burn rate on that, right.

So, we know that the 50% is gone because that’s our predictable, fixed things. That’s the things that are just going to happen anyway. With discretion, I might save some and I might not save some. So, that’s also likely to be burned.

And then in this 20%, that allows me to be applying a decent chunk of money toward future things in a way that we are not inclined to do because of our present bias. And a budget allows us to make visible, sort of, that we have broken this down in a healthy way.

Now what’s the real value in this choices bucket? I want to focus on this for a second. One of the real values of structural partitioning when it comes to this middle bucket, this choices bucket, is what you see when you log into your bank account is a balance on that choices bucket that is smaller than your total balance.

Oscarlyn Elder:

Right.

Perry Wright:

And here’s the value of that. We, as human decision makers, we often will do things like anchoring and adjusting. If I look and see a very big balance, I might give myself much more moral license to buy a thing that I want right now that is not really aligned with my long-term goals, because I saw a big number. And if I see a smaller number, I might be more deliberative about applying some of that smaller number toward this thing that is not aligned with my long-term goals.

I’m not telling people to never buy things that are not aligned with their long-term goals. What I want is for us to put ourselves in the best position to think about those trade-offs, right. That was, again, that was one of the big features of the visibility piece of this, was it allowed you to see visibly the trade-offs between the things that you’re spending money—because money is fungible, and budgets are an artificially constraining model for trying to make money that is fungible do a number of competing things at the same time.

So, I want to have a smaller balance from which I’m making choices. This big balance of things that I know are fixed, the whole reason that I want to partition that off is because I can’t make choices about that money. It’s going to go out. My mortgage is going to go out every month. Every single month, it’s going to go away, right. So, I can’t rob from that to buy concert tickets this month, right?

Oscarlyn Elder:

Right.

Perry Wright:

So, I only want to be making choices about the subset of my money that represents money that I actually can be making choices about.

Oscarlyn Elder:

So, as we bring this kind of all together, I’ve made some notes on what I think the most powerful nuggets are that you shared with us today. And I just want to recap for our listeners what the main takeaways are.

I think number one, it’s that budgeting is a tool. Budgeting in and of itself is not the action. It really is a diagnostic tool that helps you understand where you are in the journey, right. It brings the visibility into your behavior but in itself is not the action. It’s a diagnostic tool.

The second thing that I took away was within the budgeting exercise, broader categories are likely better than more specific and more numerous categories. So, if you make the categories more broad, you’re looking back over at least a year to help guide your estimations, that’s likely going to help you land in a better place.

And you should also understand that just having an awareness that we tend not to be very good at budgeting, we’re likely not estimating exactly, sort of have an awareness of that and maybe that alone can help you actually create a more useful budget. And don’t be surprised if you get overwhelmed when you start the process because that’s a completely normal thing to feel as you start digging into creating the budget. So, that was kind of my second category.

The third was simplified rules of thumb can help you actually translate the budget into behavioral action relative to the budget. And you brought up the fact that saying that you’re going to spend $300 a month on eating out, that type of rule is actually not very helpful. That instead creating a rule that perhaps is on a shorter timeframe and is more easy to evaluate—like we’re going to go out to eat once this week or twice this week or whatever the number is—but making it something that you actually don’t have to sit down and calculate directly on a regular basis is probably the best way to do it. Just a simple rule of thumb.

The fourth thing I heard was automatic behaviors. Anything that you can automate the movement of money—from, say, your earnings over to your retirement account or to a savings account—anything that we can automate is going to help give us a leg up on the actions we need to take.

And then lastly, this idea of partitioning or bucketing our accounts so that we’re able to bring more visibility into probably the day to day, and so that it also aligns with how we’re thinking about our budget. There’s the fixed portion of the budget, and then there’s a choice portion of the budget, and then there’s a part of the budget that’s about longer-term goals.

So, all of that fair? Did I capture that?

Perry Wright:

Yeah, I think that’s a really nice encapsulation. The other thing that I would want to remind people, just as we summarize things, is that this, what I refer to as budget depreciation, from Christina Kan’s work, that the longer it is in time between when you make a budget and when you are spending something, spending money on something, that budget’s value has gone down for a bunch of reasons.

One, you’ve bought a lot of other stuff between the time you made the budget and when you’re making this purchase. Two, the saliency in your mind of the budget you once made here in early January—it’s a new year and a fresh start. I made a new budget. It’s now March. That is a long time since I actually sat down and did this exercise.

So, the saliency and the thoughts about the various goals that I identified based on this whole diagnosis, those have eroded in our mind. They’ve depreciated. The value of that budget has depreciated in this one decision or another. So, having those simplified rules of thumb that I set up back in January for the ways I wanted to spend money, say, on eating out, that’s going to really help me because the budget can fade into the background a little bit until we revisit it.

But the rule of how, of the actions I wanted to take…

Oscarlyn Elder:

May stick with you a little bit longer.

Perry Wright:

We made them easy enough to not make ourselves have to be sophisticated. I don’t think about how I buy food based on the amount of money that I spend on food. I think about food based on what did I stuff into my gullet, right.

Oscarlyn Elder:

It’s about the experience, right. Exactly. It’s about the experience.

Well, Perry, thank you so much for taking us behind the scenes to explore the psychology and the reality of budgets and to provide helpful tips to make it a more fulfilling experience for our listeners.

I know this discussion is going to help us be more mindful about our spending and how it relates to our values, and ultimately, I think this discussion is going to help people actually be more confident. So you made the note around confidence and the relationship to budgeting. What we’re looking to do is actually help people increase their confidence and actually move them toward action to fulfilling their goals. And I think we’ve done that today.

Before we go, we have a tradition on the podcast where we ask each guest this one question: What’s the one thing that you’ve been meaning to do but you haven’t done, and that you’ll commit to doing in the future?

Perry Wright:

I think this is a great question. And what a great opportunity on a podcast to say it in front of a bunch of people.

Oscarlyn Elder:

Exactly.

Perry Wright:

So, my wife and I have a 5-year-old and a 20-month-old, and I have been building them a treehouse lately. And I have the floor joists laid and it’s up in the trees and it’s very precarious, but the thing I haven’t done yet that I’m going to commit to do right now is, this treehouse needs a safety railing on the front, because tree houses should be 25% dangerous to be fun, but they probably shouldn’t be 80% dangerous to be fun the way this one currently is.

So, I’m committing to getting a railing designed and put onto this treehouse in the near future. It’s getting cold and wet around here. I live in Durham, North Carolina. It’s getting colder and wetter around here, but I’m going to try to get this done before the end of the year.

Oscarlyn Elder:

Perry, that sounds like a very important item that you need to get done. So, we definitely need you to move to action on that. We want your kids safe. And so thank you for sharing that. And also, I just have this beautiful vision of a great treehouse that’s a lot of fun.

Perry Wright:

I’ll send you a picture down the road.

Oscarlyn Elder:

That sounds good.

Perry Wright:

Thank you so much for having me.

Oscarlyn Elder:

Absolutely. And thank you to our listeners for joining me today. If you liked this episode, please make sure to subscribe, rate, and review the podcast and tell friends and family about it. And if you have a question for me or a suggestion for the podcast, email me at DoThat@Truist.com.

I’ll be back soon for another episode of I’ve Been Meaning To Do That, the podcast that gets you moving toward fulfilling your purpose and achieving your financial goals.

Talk to you soon.