Have you ever noticed yourself feeling a little richer when the stock market has a good day? Maybe a big compliment from your boss sends you to Macys to buy a new watch, because you feel a promotion might be in your future? Maybe housing prices are up in your neighborhood and so you feel it’s the right time to buy that sports car? These feelings of wealth influence our purchasing decisions, yet in each scenario, you didn’t actually have any more money in your pocket. This phenomenon is called the wealth effect.
The wealth effect refers to an increase in spending due to an increase in perceived wealth and having a budget in place is the only way to protect yourself from it. Stock market gains and increased housing valuations can certainly make us go out and spend money and economists are very aware of this. Much like when we receive a fat refund check from the U.S. Treasury; without a budget, the money can be wasted or used to pay off debts incurred when the wealth effect last attacked us.
There are people reading this who think that budgeting is something that people without much money have to do. Expressions such as “we’re on a budget” and shows called “Cooking on a Budget” have compounded this misnomer and it’s all intolerably inaccurate.
Budgeting is actually for people who want to achieve their financial goals, wealthy or struggling. In fact, people with the most money are notoriously the most prolific budgeters. Having, or being on, a budget simply means that you have financial goals and that, to any extent, you have started planning your future.
My book Budgeting Doesn’t Have To Suck teaches you a new method for arriving at your budget by realizing your values and then letting your budget create itself. I also introduce you to the best budgeting tools out there. And whether you read my book or not, be sure you at least have a decent budget routine in place so that your spending is controlled by your budget, not your emotions.
PHOTO CREDIT: miz_curse_10
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