Don McMinn

Before Mary and I got married, we developed a simple, handwritten budget—two columns (income, expenses)—and every month we updated it and talked about any variances. When computer software became available we used Quicken. We’ve had an annual budget for 46 years. It’s worked well for us.

Every organization and family needs a viable budget. I’m amazed at how many people deal with budgets at work but don’t use one for their personal finances. Budgets are necessary and beneficial in both venues. [Do you have a personal budget?]

A budget is a financial plan.

The budgeting process forces you to think realistically about income and expenses. A budget produces transparency about expenses and helps you prioritize income. When my daughter first considered buying a car she was surprised to discover the actual costs of ownership (payment and interest, insurance, gas, repairs, toll tag, registration). A budget makes that transparent.

A budget is a plan, and plans often change, so mid-year adjustments are sometimes necessary, but they should be minor and infrequent.   

A budget allows you to manage your finances.

You can’t manage what you don’t measure. If you go on a diet, you can’t manage it unless you regularly measure your weight. If you want to learn a new skill, find ways to measure your progress. 

A budget allows you to measure and therefore manage your finances. You’ll realize how your money is actually being spent (for instance, spending $4.50 every morning at the coffee shop will cost you $1,642 annually), and most importantly, you’ll discover if you’re spending more than you’re making. 

A good budget eliminates surprises.

One sign of a good budgeting process is that there are few financial surprises – large, unexpected expenses. Anticipate your financial needs—particularly large purchases—and put money aside to make sure you’ll have funds when needed.  

For instance, both our cars are paid off, but we continue to make a monthly $500 car payment into a savings account. (Long term, it costs us about $250 a month to drive a decent car, so $250 x 2 cars is $500.) When our current cars need replacing we’ll have enough money to pay cash for new ones. Our refrigerator is 26 years old so it could die any day. We’ve already set aside $2k for a new one, so we won’t be surprised or dismayed when the current one expires.

An annual budget should prepare you for retirement.  

When you’re in your 20s and 30s, it’s hard to imagine that one day you’ll be old, and that you need to start now to financially prepare for those later years. But old age inevitably arrives.

My personal advice: Starting with your very first paycheck, invest at least 5% of all earned income in a low-expense index fund that represents the broad stock market. Don’t try to outguess the market because long-term that doesn’t work. Just put your money in an index fund and don’t touch it until you get old. Do that for 45 years and you’ll be in good shape financially. (When I was 30 years old I withdrew $10,000 from my retirement account to pay for…[I can’t even remember]. If I had left the money in the stock market it would be worth $210,000 today.)  

An annual budget is not just about the next 12 months, it should also prepare you for old age.

When is the best time to plant a tree? Twenty years ago. When is the second-best time to plant a tree? Now. The same applies to budgeting. 

I don’t want this post to be morbid but it starts out that way. The main theme is living life to its fullest, but first let’s talk about death.

Death is inevitable and unforeseeable. It can occur suddenly at any time, or it can approach slowly and predictably. 

As I get older (and particularly as I approach that ominous statistical factor—the average life-expectancy of a male living in America) I often think about final experiences, because for everything I do in life, there will be a last time I do it. There will be a final time that I eat dinner with my family, embrace Mary, sing For the Beauty of the Earth, see a sunset, visit London.

This thought doesn’t bother me; it doesn’t make me anxious or fearful. To the contrary, it’s beneficial because it reminds me to savor every moment of each day and to delight in experiences both great and small … to approach every experience as if it were my last time to do so.

For instance, the last time we visited Dubai I said to Mary, “This is probably the last time we’ll ever come to Dubai, so let’s enjoy it fully.” Though we go to London every year at Christmas, last year may have been our last. You get the point.

This exercise in crafting perspective requires negotiating the inevitability of death with the immeasurable joy of living.

To end this post, I’ll defer to poets.

Thoreau encouraged us to live fully in the moment when he wrote, “I went to the woods because I wished to live deliberately, to front only the essential facts of life, and see if I could not learn what it had to teach, and not, when I came to die, discover that I had not lived…I wanted to live deep and suck out all the marrow of life.” (from Walden)

Hermann Hesse wrote,

“Life passes like a flash of lightning
Whose blaze barely lasts long enough to see.
While the earth and the sky stand still forever
How swift changing time flies across man’s face.
O you who sit over your full cup and do not drink,
Tell me, for who are you still waiting?” (from Klingsor’s Last Summer)

You never know when you’re experiencing something for the last time so enjoy every moment of life.

 

Let’s start with an object lesson.

Hold an object in your hand—like a pencil, book, or napkin—extend your arm full-length, and drop the object on the floor. It’s a very visceral experience. 

Now metaphorically place in your hand something that you’re frustrated about but don’t have any control over, or something you’re needlessly upset about. Extend your arm full-length. Before you move a muscle, make a decision that when you release your grip…when you drop it…you’ll also release the troubling issue from your mind. You’ll no longer talk about it, worry about it, or replay the mental tapes associated with it. 

Now uncurl your fingers and drop it.

I know this sounds like a bunch of new-age, self-help, nonsense. But I have found it to be a helpful exercise to mentally and emotionally release something that has an inordinate and unhealthy hold on my mind.

Sometimes Mary and I use this exercise during a conversation to help each other deal with an issue one of us is stuck on. When she senses that I’m getting worked up over something that’s either unimportant or an issue that I have no control over, she’ll close her fist, extend her arm, and drop it. I immediately know what’s she’s suggesting.  

Sometimes I get unnecessarily torqued over insignificant issues.

Recently, I was bothered when my physician prescribed an antibiotic that no pharmacy in town had in stock. When I called his office he changed the prescription to a common, readily available medicine, but why didn’t he do that the first time? 

I lingered over that incident longer than necessary. When I told Mary what had happened, she gave me the sign, and I dropped it. 

Sometimes I get worked up about something that is out of my control or my ability to influence.

Political shenanigans come to mind. Most of us bemoan the state of affairs in our country (regardless of which side of the aisle you support) and while we do have the right to vote, much of what goes on in the short term is beyond our control. I often remind myself to drop the frustration I have relative to our politicians.

The beginning of Reinhold Niebuhr’s Serenity Prayer is good advice:

God grant me the serenity to accept the things I cannot change,
Courage to change the things I can,
And wisdom to know the difference.

Now, reread and follow the advice of the paragraph above that begins with “Now metaphorically place into your hand…”  and see if it helps you release a troubling issue you’re wrestling with.

Anchoring (also called focalism) is a cognitive bias in which we become inordinately influenced by initial information (considered to be the “anchor”). Once we accept the anchor, all future judgments, decisions, negotiations, arguments, estimates, etc. are made in relation to the anchor. And we become reluctant to embrace information and facts that challenge the initial information. 

In short, we tend to rely too heavily on the first piece of information we’re given. It unduly influences our thinking.

For instance, anchoring is used by businesses and organizations to manipulate the perceived value of a product or service. The retail price of an item is listed (anchored) at $450, but it’s now on sale for $215. Naively, we may think the product is really worth $450 (though it may be worth only $50) so we believe the lower price must be a good value. To make matters worse, we may not even be interested in the item, but the “good deal” seems too good to pass up so we buy something we don’t need at an inflated price.

We can also become anchored to a plan of action, our first impression about an individual, a political persuasion, or the first comment we hear about a current event. 

Do not underestimate how gullible we humans are to this effect. In a study by Dan Ariely, an audience is first asked to write the last two digits of their social security number and consider whether they would pay this number of dollars for items whose value they did not know, such as wine, chocolate, and computer equipment. They were then asked to bid for these items. The audience members with higher two-digit numbers submitted bids that were between 60 percent and 120 percent higher than those with lower social security numbers. The number had become an anchor. When asked if they believed the number was informative of the value of the item, quite a few said yes. Even though everyone’s social security number is a random series of digits, those numbers had an effect on their decision-making. [My social security number ends with 00, so I probably would not have even bid.]

It’s very hard to totally avoid anchoring bias. Like all cognitive biases, it happens subconsciously, and it’s hard to identify, much less challenge subconscious thoughts. Here are some suggestions.

1. Be skeptical of first impressions. Challenge all thoughts and statements, but be particularly doubtful about first thoughts and statements. Develop counterarguments to primary thoughts.
2. When making a decision, always consider alternative options.
3. When making decisions as a group, designate someone to be the devil’s advocate—someone who will intentionally oppose and challenge the group’s ideas.