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"it is" vs. "i will": prescriptive and descriptive budgeting

A lot of people shudder when they hear the word “budget”. And why shouldn’t they? The popular view is that a budget is like a diet writ large — but instead of just limiting your eating, it’s limiting every fun part of your life! No wonder virtually no one keeps a budget — trying to actively limit every single aspect of your spending is a sure recipe for burnout! Luckily, budgeting doesn’t have to be like that. Enter descriptive budgeting. Prescriptive budgeting is what you traditionally think of when you think of budgeting: “I’m going to write this number down and pinky swear (or, even better, establish a system like the envelope method) that I’m not going to spend more than X amount on Y.”

defeating your worst enemy

Last week, we talked about how your own worst enemy when it comes to investing is yourself. So how does one go about defeating an enemy so subtle, so intelligent, and so very…you? Well, here are a few systems that can help. Have a written plan, and a regular date in your calendar for reviewing it. Whatever your plan is — whether you’re a businessman or an academic — write that plan down. If you don’t have a written, solid plan, it’s a good bet that you’re going to let your emotions change that plan whenever you feel like it. If the market crashes, it’s too late — if you sell then, you’re just buying high and selling low! So write a plan, review it once every 6-12 months, and only change the

your own worst enemy

There are two stories that I am tired of hearing. One is a story of greed. I heard it a lot around the turn of the century, and again just before the 2008 crash. It took many forms: day-trading with a 401(k); dumping Oracle stock for that of a smaller company because the database giant was “only” scheduled to double; after some clever analysis, placing a disproportional bet on muni bonds. In every case, the portfolio in question became dangerously out of balance, and when the inevitable crash came, it lost far more than its share. In the cases where its owner was approaching retirement, the impact was disastrous. The other is a story of fear, and I’m hearing it a lot now. Retirees whose ent

systematically solve your financial problems, part 4

So: you’ve identified the problem, chosen a system, and established criteria for success. Now all that’s left is to implement the system and wait for success to find you, right? Well…no. As I mentioned last week, every system is an experiment, so as with all experiments, you need to periodically review and tweak your system. This is what trips most people up. Once a plan is in place, they feel this rush of relief, almost as if they’ve already beaten whatever problem they’ve come to solve. So they go on their merry way…and are completely blindsided when their system blows a gasket or simply fails to start. No, every system needs regular care and feeding, whether it’s weekly, monthly, or even

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