Better Budgetting

Have you become anchored? Quite likely you have. Anchoring is a well know subject in psychology and we are all affected by it.

Worse still, we are all affected by it even if we don’t know that we are. Sometimes we anchor to completely irrational ideas.

There are innumerable studies that prove it. One of them, Strack & Mussweiler (1999) asked half their group, “Did Gandhi die before or after the age of 9 and how old was he when he died?” the other half was asked, “Did Gandhi die before or after the age of 140 and how old was he when he died?”

The 9 and 140 are clearly irrational and unhelpful, yet they influenced the outcome. The first group average guess was that he was 50 when he died and the second group guessed 67. Big variation. Co-incidence? Not likely.

We, for convenience I suppose, anchor ourselves to things that have happened. Like last year’s spending, or last year’s investment return, or last year’s inflation.

When you do this year’s spending budget, are you required to accept last year plus a little for inflation or should you use some other method? Anchored people use last year as defining. So do most bureaucracies.

In the 70’s there was a process called zero-based budgeting. It required each line item to be justified as if it had never been seen before. The purpose was to root out the things that consumed money but no longer contributed equal or greater value.

Essentially, zero-based budgeting asked, “If I was not already doing this, would I start?”

It is might not make sense for every line in a personal budget because some things just are, or so it seems. Things like municipal taxes, or the house insurance or the heat. But, are you sure they are immutable? Forcing yourself to think about each one may discover new approaches. That could be valuable for you.

How many features on your cable bill could be dispensed with for no great loss in value? Alternate cell phone plans available? Car repairs versus new car cost? Lunch out versus brown bag? How much should car insurance cost? And about 40 more.

Most people do not suffer financially because they are stupid or unlucky or poorly informed. Most suffer financially because they are careless.

The past does not necessarily define the present. Doing a budget carelessly implicitly assumes that it does. You can change your method and earn value for doing it. Zero-based budgets are about the “Meaning” of each line as opposed to the price of each line.

By the hour, you will be very well paid for your efforts.

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Contact: don@moneyfyi.com | Follow Twitter @DonShaughnessy

Don Shaughnessy is a retired partner in an international public accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.

3 Comments on “Better Budgetting

  1. Pingback: zero based budgetting | alifesgayventure

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