Why a budget is like a diet — often ineffective

Media Lab researcher develops wallet that’s harder to open as you spend more

What would you do if your wallet became harder to open as your spending approached or exceeded your budget? Would you think twice about where your money was going?

A product designer at the MIT Media Lab who created a working prototype for such a wallet seems to think so, and he may be on to something. Part of the reason so many people spend too much, or fail to stick to self-imposed budgets, is because parting with our money has become an abstraction in our increasingly cashless society. Credit cards provide immediate gratification, but no immediate consequences. Plucking actual dollars from your pile of cash, research suggests, is more painful, and leads you to spend less.

There’s another factor that prevents people from being model financial citizens (besides, of course, uncontrollable circumstances like joblessness). As a species, humans are notoriously poor at following through with their plans. Sticking to a budget — a dirty word even among many financial planners, who prefer the more euphemistic “spending plan” — feels too much like dieting. And we often fail at both for the same reasons: too much focus on the restrictions, not enough on fun. So it’s not surprising when people end up bingeing later, more than making up for dollars not spent or calories not consumed.

On, the popular money-tracking website, top goals among the nearly half a million users who set them include paying off debt, creating an emergency fund and saving for retirement. All virtuous goals, to be sure.

The battle, say money and psychology experts, is finding ways to close the gap between good intentions and human nature. So at a time when every dollar counts, how can you accomplish what you’re not necessarily wired to do?

It may be a while before that smart wallet hits the shelves (a hinge in the middle of the wallet, wired to your bank account balance via a Bluetooth connection to your cell phone, makes it harder to open as you reach a spending limit). The main inventor, John A. Kestner SM ’10, said he’s working on bringing its retail price down to $60, to “avoid obvious irony.”

But there are plenty of mental tricks and strategies that can make your budgeting more sustainable now. In fact, the best strategy is not to think about it as budgeting at all. Instead, set up broad goals and automate all savings and other priorities where you can.

“Self-control is wonderful, but it’s just not sufficient,” said Meir Statman, a finance professor at Santa Clara University who focuses on behavioral finance and is the author of What Investors Really Want.

Start by becoming more conscious of your spending, whether you jot it down in a notepad, on a spreadsheet, or on websites like Then, give your spending plan a sense of purpose; budgets with a goal, whether it’s a European vacation or buying a home, tend to be the most successful.

One strategy to keep spending in check is to employ what’s known as mental accounting — dividing your money into separate mental accounts that you treat differently.

“From a psychological standpoint, there is merit to having a separate account for entirely discretionary or luxury spending,” said Steve Levinson, a psychologist and co-author of Following Through: A Revolutionary New Model for Finishing Whatever You Start. Spending $100 out of $300 earmarked for fun will feel more meaningful than pulling out $100 from your entire $3,000 monthly budget.

The easiest way to set up a system, experts suggest, is to put your income into separate accounts or subaccounts, including one that distinguishes spending money from money needed for recurring household expenses. And think about working backward: Instead of setting up an overly detailed budget, first decide how much you want to save for retirement and other goals, then work with what’s left over. Life has a natural way of derailing even the best-laid plans, so experts recommend building a cushion, or a slush fund of sorts. “It’s the one-time expenses that kill a budget,” said Rick Kahler, a financial planner in Rapid City, S.D. “The average person needs to be saving for car repairs every month, they need to be saving for their trips, for Christmas, for medical expenses.”

Just don’t rely on doing it yourself. Arrange to have the money withdrawn from your paycheck. “We need to exploit automaticity,” said Professor David Laibson, a behavioral economist at Harvard. He points to the success of automatic enrollment of new employees into retirement savings plans, like 401(k)s. “We need to build in more of these commitment mechanisms, so we can live up to our intentions.”