Today I want to reframe how we think of budgets. I will use the German psychiatrist Franz Muller-Lyer illusions as a metaphor of how we make decisions with reference to the two main components of the budget (savings and spending).  I want to demonstrate that there are factors outside the scope of spreadsheets and numbers that affect our ability to budget successfully.

Before we get into the comparison, I’ll take a moment to acknowledge what the general consensus is about budgets. Many hear the word budget and immediately think straitjacket, restrictions and mind-numbing number crunching which they would rather not do.  Is it possible for us to change our perspective of a budget?  Can we see it as a tool? A tool which automates our cash flow for the month and in so doing gives us more time to focus on other important issues in our lives.

When we know where our money is going each month, it allows us to put into perspective what is really important. It is necessary to take a moment and step back and look and see where we are and determine if we want to be there. If not, what do we have to do to get where we WANT to be? This is the whole purpose of having a budget. A budget is a tool that helps to highlight financial shortcomings. It forces us to find clever ways to overcome these shortcomings.  A budget in short is the blueprint for our financial success. It is the practical, implementable part of secret formula for wealth.

 THE SECRET FORMULA: (Save>spend)*(1+r) t

 If you are venturing into budgeting for the first time, start simple and ensure that you cover your basic expenses (food, home, clothes and insurance).  Then you can either save or pay down debt with any remaining funds.  If it is the case that you don’t have enough to cover the basics then, you will have to make some changes. A budget will help to both reduce and stop the accumulation of debt. Perhaps you may need to consider downsizing or maybe you need to find a new job or get a promotion. As you can see working with a budget may require you to take stock of other aspects of your life.

Here some practical steps you can follow to get started:

  • Establish what your current income and expenses are— take a snap shot of where you are.
  • Set goals. Figure out where you want to be financially. What is financially important to you? Saving for a major purchase, reducing debt (aka spending less) etc.
  • Design your budget—be sure to buffer for seasonal expenses and emergencies—this is a pathway for achieving to your goals. There are many resources available online that you can use. Find one that works for you and start designing your budget. I recommend the Financial Consumer Agency of Canada website: http://www.fcac-acfc.gc.ca/Eng/forConsumers/topics/budgeting/Pages/home-accueil.aspx
  • Start implementing—this is usually the hardest part, here is where disciple and determination come into play.
  • After a month or two, review and fine-tune.

Remember, it is not necessary to get it perfect the first time. A budget is a living document that changes as your circumstances changes. A budget is ever evolving and ongoing.

Now let’s get back to the illusions and see what lessons we can learn from them.


Take a look at the images. Are the tables the same size? The table on the left looks longer than the one on the right. However, both tables are the same size. You can prove this yourself by measuring the images. The moral of the story is what we see influences what we perceive. Our perception of what is may not be a true reflection what actually is.  No, I swear I am not trying to mystify you. I am only trying to point out that if we can’t trust our vision to perceive what is really there, what does this imply for our ability to use our cognition (thinking) to make decisions when things are less straightforward as sight?   When we are trying to spend less and save more, we are influenced by numerous external factors which greatly impact the success we have in adhering to a budget.

Let’s look at how perception affects our spending.  When we are working with a budget, it is necessary to keep spending in check. More often than not this turns out to be a mammoth task, especially if we feel compelled to spend on particular items that may not really be serving us but we have come to believe that they are. Here I draw reference to Martin Lindstrom’s book Brandwashed , which essentially shows how marketers use psychological, emotional, and rational tricks to convince unsuspecting consumers to buy.

“Our brains are prone to forming mental shortcuts […] known as somatic markers, that link cues from our physical world to specific emotional states […] Shrewd companies are able to actually plant these somatic markers in our minds by creating associations between some positive emotion and their product.”  Brandwashed, page 199

It is well known that multinational companies invest a lot of money, time and effort to do research that allow them to sell to us without realising that we’ve been sold to.  Marketers use emotional marketing to entice and convince us that we “need” a particular brand. Does this mean that we are just programmed drones for the marketers? No. We are only susceptible if we allow ourselves to be persuaded by these marketing ploys. To counteract these manoeuvres we need to recognize that it exists and then ensure that we make conscious choices. We have to take the time to see whether a product is actually adding real value to us or just a perceived value.

Now let’s look at how perception affects our savings and investment decisions. The financial industry uses fear to disturb and motivate us. The financial industry often uses statistical illusions to scare us into buying a particular product. On the one hand, they are doing us a service because they are getting us to invest and to take charge of our finances. However, what I have found is that scare tactics may work to get people to start investing but it does not guarantee commitment. When decisions are based on fear or intimation there is no staying power, within a year people either withdraw or simply stop contributing to the any type of savings plan.

You will be more committed when YOU are the one in the driver’s seat and calling the shots. You don’t have to be a financial expert to do this. You do however; have to know what YOU want.  If you don’t know what your financial goals are, you will be at the mercy of others. Your savings and investment plans might be designed based on what others think is best for you. I have personally seen the tragedy of going down this path. I know that many people get overwhelmed, especially when there are thousands of mutual funds and countless other savings vehicles to choose from. It is no wonder that people get confused and are overwhelmed. When this happens, they simply go to the default or worse, do nothing.

Here is what I have to tell you. You don’t have to know everything about mutual funds or other savings vehicles to be in charge of your financial destiny. You simply have to know what you want to accomplish. This is the foundation for everything. From this point you can start building your investments based on your goals and objectives. You will be in a better position to guide your advisor. If you have a good financial advisor, they will work hard to ensure that the investment vehicle chosen will suit YOUR specific needs.  You will find that it is easier to commit to investing and saving when YOU make the decision and not when it’s made for you.

I know this wasn’t a typical budgeting post. My aim was to show that the successful budgeting goes beyond the numbers.  We need the tools to design a budget, but that is only the beginning. Real budgeting success requires commitment, discipline and determination and an understanding of what forces are out there to distract us.  We need to stop thinking of a budget as a straitjacket and starting seeing it as a springboard from which to launch one’s financial success.

I would love to hear from you, what’s your experience with budgeting?

Dr. M



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