Having a budget is one thing—sticking to it is another

The lure of instant gratification can make sticking to a budget a real challenge. But a few simple suggestions can help you and your family successfully keep within a budget.

In the September issue of Liber8, a monthly newsletter published by the Federal Reserve Bank of St. Louis now called the Page One Economics Newletter, there is an article about how the desire for instant gratification can overpower any thought of eventual regret and lead one to make decisions contrary to his or her professed self-interest.

Economists call this phenomenon “time inconsistency” and it helps to explain why certain people buy things they know they can’t afford. According to the article, a person with “time inconsistent” preferences values the present more than the future. Consequently, they will make buying and savings decisions with a present or instant gratification bias, choosing to be happy in the moment despite the possibility of negative future consequences.

The article goes on to suggest a way that a “time inconsistent” person can increase the likelihood that they will act in a more “time-consistent” manner and thus make decisions that will take into account their future happiness. In other words, the article suggests a way for someone with a “time-inconsistent” bias to increase their chances of living within their means, i.e. not only having a budget but keeping it.

What the article suggests is that instead of making spending and savings decisions with discretion, that is, selecting a course of action once a situation arises (you spot a shiny new something that’s not in your budget and you simply swipe your credit card to get it), it’s far better to enact/have a plan or rule that will dictate what action you’ll take. For example, if someone has adopted a “cash only” rule, they may still be tempted to buy the shiny new something but they’re unlikely to be able to do so, at least not without going home and thinking about it.

Other examples of plans of action that can help curtail “time inconsistent” behavior are payroll deduction savings plans, blocking TV shopping channels, staying out of stores unless you’re going for a specific items or items and closing credit card accounts. While not everyone needs to adopt these or similar plans, doing so will likely result in one’s acting in a more “time consistent” manner thus increasing the chances of staying within their budget and maximizing his/her future happiness.

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