Bluefield Daily Telegraph, Bluefield, WV

Slate

April 18, 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
Slate
  • The case for separate beds

    The other night I slept on a twin bed in the guest room of the house I share with my husband and our two kids.
    It was the best night's sleep I've had in years.

    April 18, 2014

  • Allergies are the real midlife crisis

    One of the biggest mysteries is why the disease comes and goes, and then comes and goes again. People tend to experience intense allergies between the ages of 5 and 16, then get a couple of decades off before the symptoms return in the 30s, only to diminish around retirement age.

    April 16, 2014

  • treadmill-very-fast.jpg Tax deduction for a gym membership?

    April marks another tax season when millions of Americans will deduct expenses related to home ownership, children and education from their annual tax bill. These deductions exist because of their perceived value to society; they encourage behaviors that keep the wheels of the economy turning. So why shouldn't the tax code be revised to reward preventive health?

    April 15, 2014 1 Photo

  • Boston doctors can now prescribe you a bike

    The City of Boston this week is rolling out a new program that's whimsically known as "Prescribe-a-Bike." Part medicine, part welfare, the initiative allows doctors at Boston Medical Center to write "prescriptions" for low-income patients to get yearlong memberships to Hubway, the city's bike-share system, for only $5.

    April 11, 2014

  • A man with amnesia taught us how memories become personal

    Although not as celebrated as the late American amnesiac H.M., for my money K.C. taught us more important and poignant things about how memory works. He showed how we make memories personal and personally meaningful. He also had a heck of a life story.

    April 7, 2014

  • Investing more money in tornado research would be a disaster

    This week, the U.S. House of Representatives passed a bill that would require National Oceanic and Atmospheric Administration funding to focus on improving forecasts of "high impact weather events" like tornadoes and hurricanes "for the protection of life and property and the enhancement of the national economy."

    April 3, 2014

  • Hate With Friends, the fun new Facebook tool

    Hating movies, earworms, conventions of grammar, clothing brands, diet fads - you get the twinkle of pleasure without the glob of guilt, or the cold brush of fear. A Coldplay song doesn't know you hate it.

    April 2, 2014

  • dog-sunglasses.jpg Do animals have a sense of humor?

    Right now, in a high-security research lab at Northwestern University's Falk Center for Molecular Therapeutics, scientists are tickling rats. Their goal? To develop a pharmaceutical-grade happiness pill. But their efforts might also produce some of the best evidence yet that humor isn't something experienced exclusively by human beings.

    March 28, 2014 1 Photo

  • news_zuckerberg.jpg The logic of Facebook's multibillion-dollar shopping spree

    Yet again, Facebook has spent a gaudy sum of money to buy a hot startup. This time, it's virtual reality pioneer Oculus VR, at a purchase price of $2 billion. And don't be surprised if Mark Zuckerberg continues on his buying spree.

    March 27, 2014 1 Photo

  • 20140325-AMX-BARISTA251.jpg Coffee's third wave? The Apple to Starbucks' Microsoft

    Do you remember when Starbucks was cool? It opened in Seattle in the 1970s as a local specialty roaster, a trendy alternative to the prevailing generic swill. But the price of conquest is cachet. What was once novel — the warm décor, the gentle music, the faux-Italian lingo — has become banal. Today's coffee snobs would rather snort Sanka than set foot inside a Starbucks

    March 26, 2014 2 Photos