Kevin Smith, President, KMS Wealth Management, Inc.
The year 2020 taught us to expect the unexpected. For the year ahead, consider making a budget with that in mind.
“There’s no reason to set a budget for the whole year,” said Abigail Sussman, Associate Professor of Marketing at the University of Chicago. “A year from now is really like 20 years from now. Time isn’t normal right now.”
Enter the micro budget. Instead of setting a budget for the year, or even for the season, try structuring your spending and saving plan on a much smaller scale. This approach has several key advantages: You’re able to better monitor your cash flow, pivot plans with greater ease and reclaim some of the “fresh start energy.” Here’s how it works.
Choosing a time frame that works for your budget —say, a month, a pay period or even a handful of weeks leading up to a big event or purchase — is key to your success.
Try a paycheck-to-paycheck budget, said Alise Kraus, President of the Financial Planning Association of the East Bay. Refresh your plan with every new pay period to set constraints while you have money coming in at the start of each cycle.
“We tend to think on a monthly level, but budgeting by paycheck can be really helpful,” she said. “It allows you to see what’s left over and what you have to save in advance, for the next time your tires blow out.”
Budgeting on a smaller scale also means you are paying closer attention to each individual transaction, some of which get lost in the broader strokes of a yearly budget template.
“A lot of people overspend in a cumulative effect: lots of tiny choices,” Kraus said. With this frequent-check-in system, the cumulative effect of those tiny choices is easier to spot. “It’s harder to sweep things under the rug,” she said.
If you already budget by pay period, experiment with budgeting by week or even on a daily basis in the days leading up to a big purchase. “This smaller-scale lets you see ‘I’ve already spent this much this week’ and it allows you to course-correct in real-time,” Krause said.
If you find yourself frequently wondering “Where does all my money go before the weekend?” or “Why can’t I stick to my budget?” Taking this smaller approach can illuminate some problem areas. Budgeting by day may help temper some impulse shopping; budgeting by week could show you just how little you use those recurring subscriptions you shell out for at the end of every month.
Once your micro budget is set up, you have a scheduled place to adjust your plan. You can audit your spending as you go but also pinpoint changes you want to make immediately. “Just don’t miss out on those bigger-picture items,” said John Beshears, a Behavioral Economist and Associate Professor of Business Administration at Harvard University. “If you’re too narrow, you’re going to miss important events. If you’re too broad, it’s going to feel too daunting.”
Regularly setting aside the money you need for emergency expenses, tax season and other longer-term financial events — like saving for a house or paying down debt — can ensure you will have the funds when you need them. Automatic deductions can do a
lot of the heavy lifting here.
Noticing when the little things sting is helpful but be sure to also notice when the tiny wins feel really good. These small moments of pride will keep your engine running. “When you’re looking on a monthly level, saving $10 doesn’t seem like a lot,” Kraus said. “But when you’re thinking on a daily basis, you see your daily habits and where your money goes.”
The psychological torpor of 2020 has also deprived us of the “fresh start effect,” which typically infuses milestone birthdays and the start of a new year with a little extra specialness. Usually, this feeling empowers our intention-setting and helps us stick to our goals.
“This year is hard because of the lack of fresh starts,” said Katy Milkman, a professor at the University of Pennsylvania’s Wharton School and author of the coming book, How to Change: The Science of Getting From Where You Are to Where You Want to Be. “Every day is the same as the day before it. We’ve missed out on the fresh starts that normally rejuvenate us.”
Luckily, a shorter-term budget automatically gives you several smaller opportunities to reclaim that “fresh start” effect. Starting anew allows you to feel more freedom and reclaim some of the excitement we’ve associated with big events in the past.
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