An professor and his student were walking. The student notices €50 lying on the sidewalk and says, ‘Look! €50 on the street!’ The professor replies, ‘Rubbish. Markets are efficient. If there were really €50 on the sidewalk, someone would have already picked it up.’
So both keep walking.
When people need to cut their budget, they generally start the process by attempting straightforward ideas:
Reductions: “I will try going out to eat less often.”
Eliminations: “I do not need to take a trip this year.”
Substitutions: “Maybe I can find a cheaper mobile phone contract.”
Eventually, however, you will exhaust all the low hanging fruits. If you attempt to hold your budget steady, you will need to continue to make routine cuts in order to combat inflation. It will not take long until all the straightforward cuts have been made. Now what do you do?
High achievement always takes place in the framework of high expectations.
— Charles Kettering
In the first part of this series on budgeting, we discussed the importance of starting the budget process by looking at the big picture. Now let us try to bring those lofty ideals down to earth. When we asked ourselves significant questions about life (listed in the previous article), we found that some of the things that were important to us were the follwing.
Understanding the mental accounting helps with spending, budgeting and investing decisions. Mental accounting means that people mentally divide their assets and income into buckets. Depending on the mental account, vastly different decisions are made regarding the money. Even though money should be exchangeable. Scientists mainly seem to be interested in trying to predict and explain behavior, so they do not necessarily label mental accounting as a negative thing. There can indeed be some positive aspects to mental accounting. However, when a mental accounting decision has a negative impact on current or future net worth and there appears to be no rational motive for it, it is a mental accounting error.
A profitable internet business model needs a huge target market. The larger the market, the higher the upside.
How to attract impulse purchases? What motivates impulse buying? Consumers made even large purchases on impulse. Three sales arguments are related to such impulse decisions. Valuable information for both, the conscious consumer and the eager salesman.
The most powerful force in the universe is compound interest.
— Albert Einstein
Why you should let time and capital work for you together as a mantra.
Reality is hard. Everybody wants something from you and you have to be cautious especially with your financials. Knowing your enemy, you will automatically select the right information in communication and think about the right questions (due the selective perception effect in your reticular activating system).
Most people or even companies live from paycheck-to-paycheck. You want to escape this debt-powered and self-imposed treadmill or hamster-wheel and jump into a new lifestyle.
The problem with financial education is that it is not taught in schools. So usually parents teach. Unless your parents are in the top 1%, they usually teach how to be poor. Not because they do not love you – they just do not know what they are teaching. They do not read books like “Rich Dad, Poor Dad” by Robert T. Kiyosaki and learn how to work with money.
Budgeting awakes many negative associations. No wonder that one-third of people do not budget at all and two-third say they are unsuccessful at budgeting. Household budgeting often stands for fantasy, guiltiness, irrelevance or negativity.
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