The Wrong Kind of Budget

What if one of our most fundamental assumptions–that the first step to financial stability is the creation of a personal budget–misses the point? A recent article in FastCompany, “Poverty Drains Mental Energy,” seems to imply just that. Let’s put it bluntly: being poor is exhausting and stressful. You have to constantly make difficult decisions: Do I fall behind on the utilities so that I can buy school supplies for my daughter? Who will babysit her while I spend 2.5 hours traveling by bus to and from an appointment to apply for food stamps?

If you look at the totality of these myriad decisions and trade-offs that are made month after month, you start to realize that you are dealing with a budget–only instead of a financial one, it’s a balance sheet that accounts for inflows and outflows of mental and physical energy. And according to Sendhil Mullainathan and Eldar Shafir, this budget is the one that really counts. In their new book, Scarcity: Why Having Too Little Means So Much, they argue that when thinking about social programs, “We never ask, is this how we want poor people to use their bandwidth? When we design poverty programs, we recognize that the poor are short on cash…But we do not think of bandwidth as being scarce as well.” At first, this sounds absurd: shouldn’t the poor be thankful for the free and low-cost programs we offer them? But if you step back for a moment, the answer becomes clear: of course they’re thankful for them, but that doesn’t mean they fit into their budget!


The takeaway here is that before we start throwing services at the poor, we have to deeply understand their circumstances and be empathetic to the unique challenges they face. Just because we put out a flyer that says “Free Financial Coaching!”, it doesn’t mean that a family struggling to put food on the table, pay rent, keep the lights on and stay healthy is going to come bounding into our office.

It’s important to track your income and your expenses with an eye toward building up your savings and your overall stability. But maybe the greatest benefit of getting a handle on your finances isn’t so much that it will build savings as that it will free up emotional energy to focus on other things. Done right, the greatest impact of financial coaching programs may not be what is typically measured–increases in savings and credit score, reductions in debt and use of predatory services–but rather something less tangible. As the authors note, a well-run program can give you “back all that mental bandwidth that you currently use to fret, worry…We’d be taking a cognitive load off [which] would help your executive control, your self-control more broadly, even your parenting.” Those impacts start to sound like the kinds that truly empower a family to move out of poverty.


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