Budgeting and the power of the category

August 24, 2013 at 10:46 pm Leave a comment

With any sort of budget, you should never have a general purpose Savings category.  You should assign every dollar to real, tangible goals that you want to reach.

Why?  Because of human nature.  Let’s think through a scenario:

Let’s say you have $200 in your Savings category.  While walking through CostCo, you see the new Zelda game just came out for the Wii U.  Being a fool for anything Zelda, you check your budget looking for the Entertainment category.  Drat!  Being the nerd that you are, you blew the rest of that category to see the new Wolverine and Star Trek movies.  Twice.  But you really want to spend the $50 to get this new Zelda game.  Wait a minute!  Savings!  You can just take it from there, right?  Hyrule here you come!

Let’s do this again, but with more thought:

Let’s say you have $75 in your New iPhone category, and you have $125 in your SSD category, so you can upgrade your laptop.  (Yes, I’m still going with the big Nerd background story.  We write what we know!)  While walking through CostCo, you see the new Zelda game for the Wii U and you REALLY want it.  Again, your Entertainment category is busted.  This time, though, instead of $200 in a Savings category, just waiting to be pilfered, your only options are your New iPhone category and your SSD category.  You really, really, really want the new iPhone 5S when it comes out in September, and you only need another $75 to get that SSD to upgrade your laptop, which has been running awfully slow lately.  If you take the $50 from either of these categories, it will push back those purchases another month, at least.

The difference between these scenarios?  In the 2nd case, you really know what you are choosing between.  Yes, you can take $50 from either category and buy the Zelda game immediately, but you know what you are putting on hold.  In this case, a person with this sort of Nerd background would probably chose to wait a month or two to buy the new Zelda game, since both of the other goals are ones that are more pressing, especially since you cracked the screen on your current iPhone, and you use your laptop to make a living.

You see, when your category name is as generic as Savings, you might as well name it Extra Money instead.  Because, when that desire to buy strikes whether it’s for a new video game, or whatever shopping weakness you have, you’ll think of that amorphous Savings category as exactly that – a pile of extra moneyBut, when your money is assigned to an actual item that you are saving up for, it makes you really stop and consider your options carefully.  You then decide which priority wins out.  You can still choose to do anything you want, but you’ll be making an informed choice.  Awareness is the key to avoiding stress with your finances.

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