2801: Personal Budgets Fail Because They Aren’t Fun. Here’s How You Fix That by U-Ming Lee

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[00:00:25] Learn more about the new Galaxy Z Flip 6 on Samsung.de. And with that, lets get right to today's article from a brand new author to the show. As we optimize your life. Personal Budgets Fail Because They Arent Fun.

[00:01:10] Heres How You Fix That by U-Ming Lee of uming.medium.com Setting a personal budget is out of style these days. Far too many people are unable to stick to one. However, its premature to abandon the personal budgeting concept entirely. I've definitely had trouble getting started with budgeting.

[00:01:32] Nevertheless, drawing up my personal budget was invaluable in getting my finances in order. My budgeting issue was that I set unrealistic goals for myself. Thus, I struggled to stick to the budget. When something happened that deviated from my budgeted expense,

[00:01:50] I succumbed to the temptation to throw out the entire budget. But it was allowing myself to incorporate fun into my personal budgeting that completely transformed my relationship with the process. It no longer felt like a meaningless exercise once I allowed myself to have some fun in my life

[00:02:08] and adjusted my budget to include fun. I understand that fun sounds out of place with a serious exercise like creating a personal budget. But let me explain why you shouldn't take the personal budgeting exercise too seriously.

[00:02:23] Then I'll show how you can easily incorporate fun into your personal budget. Delayed gratification is important, but it has its limits. The concept of delayed gratification is that you put up with a minor inconvenience now in the hope of receiving a larger reward later.

[00:02:42] All of the delayed gratification cheerleading tells us that we should do it because it's good for us. But it's based on a misunderstanding of the concept of delayed gratification. See, the delayed gratification logic of sacrifice now, gain more later only works when the gain is guaranteed.

[00:03:02] Thus, when faced with the choice between putting in more reps in the gym now or leaving early, you might choose the former because it means you'll get stronger later. However, when the prospect of future gain is uncertain,

[00:03:16] the idea of sacrificing now for later becomes much harder to swallow. For example, if you're asked to sacrifice your free time to do unpaid work now in exchange for the possibility of a promotion later,

[00:03:30] would you be willing to do so if you knew your boss made the same offer to everyone? I'm willing to bet you wouldn't be so eager to make that commitment if you knew there was a chance you'd been played.

[00:03:42] The challenge of delaying gratification to achieve financial independence and retire early, or FIRE, is even greater. Pursuing FIRE is frequently pitched as something good for our future selves. In pursuing FIRE, we meticulously calculate how much we intend to save,

[00:04:00] project how much we will earn 10, 20, or even 30 years from now, create rigorous budgets, and estimate how long it will take until we reach that net worth magic number after which we can stop working. When we do this, we make long-run predictions about many variables,

[00:04:19] including our income, how that income will grow, the returns on our investments, our average living costs, and the inflation rate, among others. Long-run budgeting seems scientifically rigorous, but it's ultimately a fictitious piece of work. Because of the compounding effect, any predictions we make 20 to 30 years in advance

[00:04:43] will be highly sensitive to minor deviations in our assumptions. We know instinctively that our FIRE target is unstable. Thus, delaying gratification until this fuzzy target is hit is not something that most people can do. That's why in recent years, there's been a flurry of reports

[00:05:03] demonstrating how much happier people are after they've left the FIRE path. Compound interest doesn't just work with money. A well-known finance concept is the time value of money, or more commonly, a bird in the hand is worth two in the bush.

[00:05:21] Compound interest shows how powerful the time value of money is. $1,000 invested now can grow into more than $17,000 over 30 years if compounded at a rate of 10%. This is the logic that FIRE advocates and some personal finance gurus use to warn people about what they consider frivolous spending.

[00:05:44] However, money is not the only thing with a time value. Experiences have time value as well. In the service industry, the old adage goes, service is remembered long after the price is forgotten.

[00:05:58] You might not remember how much you paid to attend that awesome party with your college buddies. However, the warm memories of that long-ago time spent with your best friends will last a lifetime. Passing up opportunities to gain precious life experiences might help you reach your FIRE goal,

[00:06:16] but most likely it won't. You'll be thoroughly miserable after all the missed parties, Starbucks outings, family gatherings, and other enjoyable activities you sacrificed to get there. That misery caused by prolonged austerity, which prevents you from behaving naturally,

[00:06:35] will gradually erode your willpower, making it more difficult for you to stay on that path. How to make personal budgeting fun. Set aside some money each month in your budget for small indulgences. A fun fund, if you will.

[00:06:51] This could be 10% of your take-home pay after taxes, but not more. It seems counterintuitive to plan ahead for future spontaneous fun. Nonetheless, making these plans keeps you from succumbing to the temptation to indulge or save excessively.

[00:07:09] The money in the fun fund can only be used for things that you find enjoyable. Buy a book, watch an entertaining film, treat a friend to a nice restaurant meal. For goodness sake, don't use any of this money on self-improvement.

[00:07:23] The fun fund is far too important to be spent on anything as mundane as personal growth. Opt for small but regular indulgences rather than large but occasional splurges to stretch your fun fund. Psychological researchers have long known that small but regular indulgences

[00:07:44] have far more significant impact on happiness than luxuries. They found people become insensitive to new stimuli and quickly return to their emotional baseline. They call this property hedonic adaptation. This is also referred to as the hedonic treadmill. Say you buy an expensive sports car.

[00:08:05] The car may give you pleasure for a short while, but you'll grow accustomed to it. One day, you realize that the car provided no additional enjoyment. You feel the same way you did before you bought it.

[00:08:17] Meanwhile, purchasing more minor indulgences can provide a similar boost to happiness once bought. You may still be subject to hedonic adaptation when buying smaller indulgences. But because they're more affordable, you can buy them more frequently, keeping your mental state topped up.

[00:08:35] However, instead of purchasing trinkets to amuse yourself, you might get a bigger boost by purchasing them for someone else. Studies show that spending fun money on altruistic purposes, such as buying a nice meal for a friend, makes us happier than spending it entirely on ourselves. Final thoughts.

[00:08:57] Fire has died. Retirement as a concept is also on its way out. But personal budgeting does not have to die along with these increasingly outmoded ideas. Don't treat a personal budget as if it was handed down to you on a tablet by an angry and jealous God,

[00:09:15] and you must strictly adhere to it. We're human beings, not paragons of virtue. We set ourselves up for failure by trying to meet unattainable moral standards. Incorporating some fun into our personal budgets adds much needed levity to what is often perceived as a deadly serious exercise.

[00:09:35] It serves as a reminder that we can't always keep our eyes on the future, especially when that future is clouded with uncertainty. It reminds us that we must also keep our lives grounded in the present,

[00:09:48] and that the present can also be lighthearted and joyful, not one of eternal sacrifice. You just listened to the post titled, Personal Budgets Fail Because They Aren't Fun. Here's how you fix that by Yuming Li of yuming.medium.com. And I'll be right back with my commentary.

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[00:11:29] As someone surrounded by people pursuing FIRE, I can assure you that it's not dead. However, I do think it has evolved as a concept and a movement. I think many people have realized that a financial goal can't ultimately lead to happiness,

[00:11:44] and there needs to be a balance between enjoying life now and saving for the future. I do agree with the sentiment that a FIRE number is only as good as the assumptions plugged in to calculate it.

[00:11:56] And for many of us with dynamic lives and changing circumstances, that number becomes a moving target. I recalculated my FIRE number at least 10 times before I gave up on it. While many people pursuing FIRE are constantly asking the question, do I have enough money to no longer work?

[00:12:17] I found a much more helpful question is, do I have enough money to take a risk? This is why I've gravitated towards Coast FI and Slow FI. I find these approaches are much more flexible and realistic.

[00:12:32] Many people have the misconception that FIRE people are overly frugal and only eat rice and beans. But the reality is, we simply spend less than we earn, and we focus on getting the most value possible out of the money we do spend.

[00:12:48] With the right mindset, living modestly doesn't have to mean living miserably. And that'll do it for another edition of Optimal Finance Daily. Thank you so much for joining today and every day. And I'll be back again tomorrow. So I'll see you there, where your optimal life awaits.