The Keys to Effective Budgeting: Autonomy and Automation

Most people consider budgeting an exercise in repressive tedium. But it doesn’t have to be. Tim Maurer on how autonomy and automation help remake budgeting and saving into part of a life-giving financial rhythm.

Most people avoid budgeting because they consider it an exercise in repressive tedium. But it doesn’t have to be. By applying the science of motivation, economic evidence and the art of creativity, the apparent boredom of budgeting and saving can be remade into part a life-giving financial rhythm.

In his book, Drive, Daniel Pink teaches us that most institutions still use outdated science to motivate. Known as the “carrot-and-stick” approach, Pink demonstrates that the archaic addiction many organizations have to extrinsic motivation is far less effective than intrinsic motivation, which comes from within. The most successful resolutions are those autonomously motivated. In short, the wordcould is more effective than the overused should.

So, please hear this: Only budget if you want to, on your terms. It’s up to you.

Once you’re self-motivated enough to kick off a saving and budgeting campaign, economists Richard Thaler and Cass Sunstein can help you find the most effective way to accomplish your objectives. They recommend setting up a system of default options. Dubbed “choice architecture” in their bestselling book, Nudge, Thaler and Sunstein laud the value of helpful default mechanisms. For anything.

Consider, for example, a new computer or electronic device. Tech companies know that some of their customers want a broad range of choices in setting up their new hardware and software, but most of us just want to get up and running. Therefore, when I see a default setting labeled as appropriate “for most users,” that’s what I want.

But we can also set defaults for ourselves.

You can get a long way in effective budgeting by simply establishing default settings. But the real secret is to then automate them. This appears easy to do in the case of your 401(k) (or equivalent plan) at work. You receive a company match up to 6 percent of your salary? Bang—have 6 percent of your salary deferred to your 401(k). That will guarantee you get all the free money at your disposal.

The pre-tax salary deferral default is especially effective because you likely won’t even “feel” it come out of your paycheck. You only need to concern yourself with budgeting whatever remainder is deposited into your checking or savings account. But you can set up automatic defaults here as well. You could, for example, divert 4 percent of your salary to your Roth IRA, 3 percent to your emergency reserves and 2 percent to your new car fund.

Some financial institutions have made this task even easier, allowing savers to have multiple “sub-accounts” for their money. So, you could create separate “accounts” for an upcoming vacation, holiday gifts and even your worm-farm project, redirecting a specific amount of cash the day after your paycheck hits.

I encourage you to get bit by the automation bug, using it to pay as many bills and fund as many savings objectives as possible each month. This takes care of all the heavy lifting in budgeting. Then, you can spend what’s left guilt-free, safe in the knowledge that your major priorities have been funded.

And that’s what it’s all about—funding your priorities, not just copying someone else’s. So put your mark on your budget. Personalize it.

Years ago, when my wife and I were going through that blurred phase of life so common with very young children, we knew it was important to set aside time and money to remind ourselves that we were spouses before we were parents. But when we found the time to carve out a date night, we couldn’t do it because all of our cash flow was subsumed by diapers and doctor’s visits. So we created a “date night” category in our budget—effectively planning for spontaneity. This removed the financial constraints of getting an opportunity for a night out.

You see, budgeting can be more freeing than it is restrictive. By combining the powerful forces of autonomy and automation, budgeting can become a creative, life-giving exercise instead of the burdensome chore that most people perceive it as.

This commentary originally appeared May 8 on Forbes.com

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