The top number on your budget calculation is usually your income. That's the easy part.
Your outflows are something else. It's difficult to know in advance how much all your expenses for the month will be. Your budget will break if you don't give expenses enough weight.
John Lynch, director of the Center for Research on Consumer Financial Decision Making at the University of Colorado, Boulder, researched the matter. He found that people don't really think enough about rising expenses, so they end up thinking they can afford things they can't.
* One crucial component is to create an explicit budget. Relying on vague calculations makes it look possible that everything can fit in, says Lynch, so they feel free to spend.
* Some people spend more because of the way they view willpower, thinking it's limited so they deserve to reward themselves for showing some. People who think willpower is unlimited think no reward is needed.
* There is a relationship between mood and money habits. When people are sad, they save less, spend more, and consume more. Study leaders say they should give their financial decisions another look and make a big effort to change their mood and attitude.
* Guard your home equity. Daniel Cooper of the Federal Reserve Bank of Boston found that as home values rise, some view it as an increase in their borrowing power.
He says a home should be viewed as a place to live, not as a tool for borrowing money. "If you max out a home-equity line of credit, then housing prices drop, you will be financially constrained."
