The News Courier in Athens, Alabama

Lifestyle

April 13, 2013

Slate: A better way to manage your household budget

CHICAGO — When I meet people on airplanes and they find out I'm an economist, they usually ask about stock tips. When I explain I'm not that kind of economist, they next ask why we couldn't predict the crisis. I'm not that kind of economist, either. Sometimes, they end with something about household budgeting — how do I know if I'm overspending on rent? I'm not really that kind of economist either — no academics are. But in this case, I think I might know more than the usual experts.

Most people who want to know about household budgeting turn to someone like personal finance guru Dave Ramsey, who has a carefully crafted household budgeting system. His, like many others, relies on a simple idea — sometimes called the "envelope system" — where you put your gas money in one envelope, your grocery money in another, etc., and spend only within a category.

This idea is clear and elegant — even if you don't actually use an envelope, it seems like it could be easy to stick to, and it has a nice old-timey feel. There is a problem, though: It is in violation of basic economic principles.

The principle in question here is that "money is fungible." In reality, all dollars are the same. There is no such thing as a gas dollar, a grocery dollar, a "fun" dollar. The Ramseys of the world argue you should just apportion them into the envelopes depending on what you think you might spend. But doing it this way is not actually the best way to dole out your money; you are not optimizing. Your money is just not working as hard as it should.

The system works great, as long as nothing ever changes. But the minute that some price changes, you're in trouble. Here's an extreme example. Imagine you drive to work, and your "gas money" envelope contains enough money to get you to work for the month, and maybe a little cushion. But then gas gets more expensive. You may first react by switching to a worse grade — say, from premium to regular (research shows many people do this). But if gas prices go up even more you simply will run out of money in the gas envelope. And then you won't be able to get to work. Strictly following the envelope system here would be much, much worse than "cheating": It's certainly bad for your household budget if you miss work.

Text Only
Lifestyle
Photos


Poll

Which foreign crisis is the biggest threat to the security of the United States?

Russia-Ukraine
Israel-Palestine
Iraq
None of the above
     View Results
Facebook
AP Video
Couple Channel Grief Into Soldiers' Retreat WWI Aviation Still Alive at Aerodrome in NY Raw: Rescuers at Taiwan Explosion Scene Raw: Woman Who Faced Death Over Faith in N.H. Clinton Before 9-11: Could Have Killed Bin Laden Netanyahu Vows to Destroy Hamas Tunnels Obama Slams Republicans Over Lawsuit House Leaders Trade Blame for Inaction Malaysian PM: Stop Fighting in Ukraine Cantor Warns of Instability, Terror in Farewell Ravens' Ray Rice: 'I Made a Huge Mistake' Florida Panther Rebound Upsets Ranchers Small Plane Crash in San Diego Parking Lot Busy Franco's Not Afraid of Overexposure Fighting Blocks Access to Ukraine Crash Site Dangerous Bacteria Kills One in Florida Workers Dig for Survivors After India Landslide Texas Scientists Study Ebola Virus Smartphone Powered Paper Plane Debuts at Airshow Southern Accent Reduction Class Cancelled in TN
Twitter Updates
Hyperlocal Search
Premier Guide
Find a business

Walking Fingers
Maps, Menus, Store hours, Coupons, and more...
Premier Guide
Stocks
Parade
Magazine

Click HERE to read all your Parade favorites including Hollywood Wire, Celebrity interviews and photo galleries, Food recipes and cooking tips, Games and lots more.
Business Marquee