the science of budgeting: simple steps from the public health perspective

A couple posts around the internet sparked this thought in my head today - how do you create an effective budget? I posted on this briefly before, when I came to the realization that my budget owned me and that I needed to learn a little flexibility.

Both the posts I read today brought up the question of creating a budget that works for you. I chewed on this a little and decided to write about it, because, despite professional financial experience, I actually came at this from a different perspective - that of science and program management.

I work in public health, mostly in research and policy. But I do have some expertise in program design and implementation. I also TA a course on public health practice.

Using this background, I developed my financial strategy. One of the biggest obstacles that people face is that they know they should create a budget, but they don’t really have enough data to determine what form it should take. It’s basically putting the horse before the cart - if you don’t know what the problem is, you can’t really find an effective solution. So here are some simple steps.

1. Identify the problem. Before you can design your intervention (a budget), you need to know what your problem(s) is. Sit down with all your financials and take a long hard look at your assets (including income) and debts. But that’s not all. What else is causing you stress? What is the driving factor that prompted you to act? This part is perhaps a little more subjective, but no less data-driven. Do you spend too much? Do you spend too frivolously?

2. Determine the magnitude of the problem. What is your asset/debt ratio? How much do you owe in consumer debt? What’s your savings balance? How much are you actually spending and on what?

3. Gather data. What is your current spending rate? Where do you spend? How much do you put away in savings? Break your expenses into categories and track by category. This is a tough part, because it requires passive surveillance for a few months, at a time when you’re looking to take action. But this is the first key part. How can you determine what you’re going to do, if you don’t have any evidence to support your plan? This is often the biggest failure in science as well - we come up with solutions because we think we know what the problem and it’s factors are, when too often, we’re looking in the wrong area.

4. Identify your intervention. This is where you’ll develop your budget. But that’s not all - using the data you’ve gathered previously, this is how you’ll determine what your spending limits are, how much you can reasonably save, whether you can build in flexibility, what you can change. Budgets should be fluid, and yours should reflect that. In addition, your intervention might be multi-pronged; maybe in addition to creating spending limits, you always want to identify how you can create cost-savings measures (how to lower utility bills, find cheaper gas, etc).

5. Implement your intervention. In the following few months, track your expenditures and try to meet your spending limits. It’ll take a few months to work out all the kinks. Keep track of successes and failures, and the context for each.

6. Evaluate. This is often another failure in science and finance - the lack of structured evaluation. How do you know if your intervention is working if you don’t evaluate your progress? This is the second key part. You absolutely must go back and analyze those previously mentioned successes and failures in order to determine how your budget should change. Do not expect that your first iteration will be your final solution.

7. Persevere. You’ll hit obstacles along the way. You’ll have grand successes. Either way, it’s not the small items that eventually matter, but the bigger picture. Is your savings balance going up? Is your debt balance going down? This is, of course, the third key part.

Budgeting requires behavior change, which is inherently difficult. It can’t happen overnight, and you can’t expect to see results immediately. There is a systematic process that needs to be undergone in order to see long-term success. It is also a cyclical process - you’ll come back to it again and again for refinement as you discard the parts that don’t work and strengthen the parts that do.