Updated: Nov 13
Over the next few articles and videos, I will explore budgeting, financial planning, and providing an effective financial decision-making approach. I will help you decide what is important to you and drive financial planning success.
The budgeting mindset is the foundation for building your financial life. Today, I focus on your budgeting mindset, especially in understanding how you value the most important belongings of your life. I provide budgeting tools and resources that will help you transform your budgeting mindset into long-term wealth-building habits.
About the author: Jeff Hulett is a career banker, data scientist, behavioral economist, and choice architect. Jeff has held banking and consulting leadership roles at Wells Fargo, Citibank, KPMG, and IBM. Today, Jeff is an executive with the Definitive Companies. He teaches personal finance at James Madison University and provides personal finance seminars. Check out his new book -- Making Choices, Making Money: Your Guide to Making Confident Financial Decisions -- at jeffhulett.com.
Please check out Jeff's YouTube channel for the VidCast of this article.
One of my favorite Warren Buffett quotes is
“Price is what you pay. Value is what you get.”
Warren Buffett is considered one of the greatest investors in history, and as such, he’s also one of the wealthiest people in the world. His quote gets to the heart of a surprisingly difficult human challenge, one he’s successfully overcome in his investing career. People struggle with assessing the value of the things acquired in their lives, more so than the price of those things.
Luxury brand marketers and society at large will have us believe that price and value are similar—like a higher price means a product is more valuable. However self-interested incentives and cultural influences only tell part of the story. Truly understanding the personal value of a good or service is a core cognitive challenge for the human brain.
To some degree determining the price is easy. Sure, you may need to negotiate or shop for a lower price of a good or service, but at the end of the day, price is a knowable quantity. The real challenge is understanding the value a good or service provides in your life. How do you know if a purchase is worth it? How do you know what is important to you?
Economists refer to value in terms of utility. Utility is the core driver of demand and is the aggregation of the many preferences you have for a good or service. Because the economy operates via the interaction between supply and demand, it’s important to understand your own utility—it is at the core of successfully navigating the modern economy.
In a multi-preference, multi-alternative decision, the math, which is beyond the scope of this article, to solve for the best solution would be significant. (A decision-making app will do the math for you.) Who knew utility-focused decision-making could be so challenging? Imagine how tough it could be for a more important item, like a college education, home, or car! The point is, even if you have your budget completed, you still need to clarify your utility so you can most effectively implement your budget.
People regularly demonstrate inconsistency or inaccuracy when assessing their value, preferences, and utility. This is a biological truism, based on how human brains have evolved over millennia. To some degree, equating price to utility is an often inaccurate “easy button” to reduce the cognitive load needed for making unaided utility-based decisions. This recognition and acceptance is the first step toward understanding and improvement.
You can build a utility assessment ability in two ways.
Utility Understanding: Train yourself to improve your utility assessment ability. It is more challenging than you may think. There are tools and apps today that help you gather, define, and weigh your preferences. These apps “do the math”. Check out my book for access to those apps.
Budgeting Mindset: Recognize it takes time to build your utility assessment ability. Build habits and behaviors that create discipline and provide wealth for you so that when you do learn what gives you value, you will have the resources to acquire it. The budgeting mindset and tools help with building these success-focused behaviors.
Let’s start with attitudes and behaviors. This is the “short version” of my approach to wealth building. If you can implement these, you will build wealth.
Motivation grounding: Be content with yourself, don’t spend money you don’t have, don’t buy things you don’t need, and don’t focus on impressing people.
Time frame setting: Have a long-term focus (and long-term is not two or three years). Wealth and security are built over decades, not months.
Process implementing: Save → Invest → Evaluate → Rebalance → Repeat
You may be thinking, “This does not have anything to do with budgeting!” It actually has everything to do with the proper budgeting mindset. A budget is a waste of time if you do not have the staying power to stick with it. Consider points 1 and 2 as the necessary budgeting mindset, with point 3 as the wealth-building process outcome of a proper budgeting mindset.
You’ve got this!