Budgeting to me represents a plan. A budget is a plan to maximize the value you get out of your money. Of course, for the vast majority of us, our dollars are severely limited. We are in a constant balancing act of maximizing our long-term and short-term happiness.
With this understanding, you can begin to think of every dollar as an opportunity cost. A dollar spent on housing is a dollar that can’t be spent on eating out. And a dollar spent on eating out is a dollar that can’t be spent on groceries. No one choice is better than the other objectively. It is a subjective choice of what you view as having the potential to maximize your overall happiness.
If you can’t properly categorize a dollar you can’t fully understand the opportunity cost of that dollar.
Category Budgeting: How it is…
Category budgeting is the method you are probably familiar with. If you have $1000 you divide that amongst various categories of your choosing.
Of course you can make these categories as specific as possible, but even doing so you’ll quickly find that it’s never perfect. For example, if you rent a tuxedo for a friend’s wedding, should that be categorized as “clothing” or “for others”? Should a trip to the grocery store to buy last minute sushi be “eating out” or “groceries”? Is a dine-in-movie “eating out” or “entertainment”?
If you aren’t into budgeting you’re probably yawning by now. If you are into budgeting you’re probably asking yourself “So what?” - but hear me out.
Context Budgeting: How it can be…
A great budgeting tool, to me, would go beyond simple category budgeting. Context budgeting can be used in conjunction with category budgeting to begin to better highlight the opportunity cost of a dollar spent.
A context is exactly what is sounds like. Any context surrounding the spending/budgeting of a dollar. Unlike a category, many contexts can be applied to a dollar.
The sushi you bought last minute at the grocery store? It has the context of being a #weekday #lastMinute #foodPurchase. Did it happen during a #workTrip or was it purchased from your #localGrocery? Was it #lunch or #dinner?
The tuxedo you bought for your friends wedding becomes surrounded by context tags of #wedding #sunkCost.
The dine-in-movie? #thursdayNight #dateNight #dinner #movie
WIth these tags we bring context to the surface and with that context we are able to better understand the opportunity cost.
Are you seeing a lot of #lastMinute #foodPurchase tags in your budget? How many of your dollars are going to that? How much money would meal prepping save you? Maybe you are seeing that #dateNight is costing you more than you value it each month. It might be time to bring date night back into the living room and onto the couch with a nice botle of wine and some Netflix.
A lot of you are probably groaning at the thought of having to tag all of your transactions with multiple context tags. But I’d wager that most of this could be done with machine learning and meta data surrounding the transactions. But I think I’ll save that for another post…