DID you ever go to the movies, order a giant tub of popcorn and sit there tossing kernel after kernel into your mouth until the whole thing was empty?
Even then, you scraped the bottom with your fingernails for the excess salt and gooey grease. What would happen if movie theatres gave you the same quantity of popcorn in 10 smaller bags? So every time you finished a bag, you would have to stop and consciously think about whether or not you wanted to open another. After all, one giant tub of popcorn is no big deal, but if you polished off five bags and reached for your sixth, wouldn’t you feel like a complete pig?
This is an example of how to partition.
A study by Amar Cheema and Dilip Soman in the Journal of Marketing Research showed that this is the key to controlling consumption with regards to two of America’s favourite pastimes: eating and spending. You know why controlling your spending is so hard? Plastic has killed the concept of the transaction cost. By “transaction cost,” we don’t mean the fee you pay at an ATM; the transaction cost exists in your mind. It’s the awareness that you’ve just engaged in a trade of cash for goods or services. You received something, but you spent something to get it.
In the debit era, life has become one big swipe. Whether it’s coffee at a convenience store, a week’s worth of groceries or a high-definition TV, the action is the same: a simple swipe. Our resources have become hopelessly aggregated. This means that in our consciousness, all our money is lumped into one big popcorn tub out in the stratosphere, and we don’t know exactly how much we have or how much we’ve spent this month, because we have overdraft protection and a seemingly limitless credit ceiling.
The answer to all this aggregating is to learn how to partition your budget. Here’s how it works.
Identify your discretionary income
By “popcorn,” we mean your discretionary income (the amount of money you have for spending after taxes and necessary expenses are taken care of). First things first: After every pay period, you should ID monthly bills and set up as many as possible to go out automatically each month.
Sign up with an online money management site like Mint.com. These budgeting sites have been developed with the concept of partitioning in mind. They will give you a clear image of the difference between your income and your necessary expenses so you can see your discretionary income.
Determine how you will consume
Next, let’s talk about savings. Short-term savings are for an emergency fund. Intermediate-term savings (3 to 10 years) are for personal goals, such as buying a house, going back to school or taking the trip of a lifetime. And long-term is for retirement. Now you have your “play money.” Are you a hobby person (golf, fish, hunt, bike)? Are you a party person (nightclubs, restaurants)? Are you a gadget person (music, iAnything)?
In the old days (before high-speed internet), people used the envelope system. Cash would go into envelopes marked with different budget items (food, clothing, etc.), and that’s how much could be allotted. This is an electronic era. When you connect your savings account to a tool like Mint.com, it can read most expenses and put them into a category for you (e.g., groceries, petrol, dining out). Others you will have to identify from a drop-down list. Knowing what your discretionary income is will allow you to “fill the slots” with how much you have to spend in each category.
Mix it up
This is very important. The study shows that after time, your partitioning system will become a habit. Normally that would be good, but in this case you’ll pay less attention to what you’re doing. And if you pay less attention to your partitions, you’ll pay less attention to how much you’re consuming. Translation: Just like with physical exercise, you’ll get bored and want to quit.
So mix it up. Change the order of your wants. Set yourself a different financial goal (an expensive item you’d like to buy, for example). Set yourself a “stretch goal” of putting more in short-term savings.