I was watching a Techcrunch interview about finance start-up Personal Capital (review) and was surprised by a comment about budgeting. The founder was Bill Harris, who was former CEO of Intuit and Paypal, and Product VP was Jim Del Favero, who was also a former Product Manager of Quicken. While guiding us through their new iPhone app, they shared:

Our #1 takeaway over the years was… nobody really uses budgeting. Everyone means to do it; Nobody really does it. The more important concept is cashflow. It doesn’t matter that you spent $200 on clothing this month or last month, what matters is at the end of the month, do you have more money than you spent.

So the guys in charge of the most popular budgeting software admit that… nobody budgets. Well, maybe not nobody but it’s probably safe to say that the great majority of people don’t track their spending monthly. This is an issue I’ve thought about many times. I often talk about budgeting, but I don’t really budget either.

Why is it so difficult? I point to recent books and research about willpower and how it is similar to a muscle. If we have to track every purchase, it causes us fatigue and sooner or later we give up because it becomes just too hard. Doing one push-up isn’t that hard. Doing a hundred push-ups in a row is another story.

The sheer number of choices we must make each day — what foods to eat, what products to buy, what information merits our attention, what tasks to prioritize — can be overwhelming. […] Put simply, the more conscious willpower we have to exert each day, the less energy we have left over to resist our brain’s primitive and powerful pull to instant gratification. According to one study, we spend at least one-quarter of each waking day just trying to resist our desires — often unsuccessfully.

Behavioral psychology has also found that happiness is earning $60,000 a year. As Del Favero suggests, perhaps it’s because all we really want is to spend comfortably and at the end of the month have something left in the bank account. That number just happens to be about $60k in the US.

So what should the personal finance “experts” be pushing instead of budgeting tools that nobody will use? Here’s one possible plan of attack.

1. Determine a safe savings rate. What percentage of your salary do you need to save for retirement? The idea of a safe savings rate was introduced and researched by Wade Pfau, and varies based on the assumptions. 15% is a good minimum number to start with, although if you don’t want to work for 30 or 40 years you’ll have to save more.
2. Automate that savings. Automatic 401(k) or 403(b) deferrals are great, as well as automated contributions to Roth/Traditional IRAs. It’s best to have the money taken away before you even see it, so there is no temptation to spend. Every automation means one less decision.
3. Check your cashflow. Are you good? Then stop, and enjoy your life. Or do you still spend more than you earn, net of the automatic savings?
4. Don’t think about the small things. Deciding not to get that coffee or not to order lunch with all your coworkers every day may exhaust more of your willpower than is worth it.
5. Instead, try attacking one BIG thing. Housing and cars are the biggest expenses for most people. Moving into a smaller or cheaper apartment or house. Move closer to town, sell a car, and use public transportation. Switch to a economical car and drive it for 10 years. Look for something you can cut once, albeit painfully. You may not like it initially, but it’s much easier to get used to that than to rely on repeated displays of willpower.

For example, a prospective college student with limited financial resources can choose to go to in-state university instead of private, as opposed to worrying about the price of every textbook and having to constantly choose between studying, socializing, or working at one of three part-time jobs on the side.

Below is a chart of the breakdown of government spending from 50 years ago, 25 years ago, and today. There are many differences between the political and economic environments of 1962 vs. 1987 vs. 2012, but I still think it’s still very interesting. Image credit to Lam Thuy Vo of NPR Planet Money, using data from the Office of Management and Budget. Click on chart to view original post and additional commentary.

Summer is coming, and that often mean rising gas prices. A comment from reader Thadf reminded me of an old post from late 2008 about hedging gas prices using ETFs. He points out that looking back, using the United States Gasoline ETF (UGA) was a much better hedge than using alternative ETFs like the United States Oil ETF (USO) and iPath S&P GSCI Crude Oil TR Index ETN (OIL) which tracked crude oil futures instead of unleaded gasoline.

All of these ETFs use futures to try and match the price movements of a commodity, but they don’t actually hold the commodity itself as storage and transaction costs would be cost-prohibitive. The concern back then was that UGA only started trading in February 2008 and was thinly traded so the bid/ask spreads could be wide and NAV premiums could be high. Today, UGA still has significantly net assets than OIL or USO.

Here’s a chart of the past 3-year performance of USO vs. OIL vs. UGA, via Google Finance:

Here’s a chart comparing the past 3-year price change of UGA vs. gasoline prices at the pump. UGA daily closing prices from Yahoo Finance, national average gas prices from the US Energy Information Administration.

The tracking looks better than expected, considering the concerns I’ve read about contango and hedge fund manipulations. UGA’s expense ratio is 0.80%. I wonder how much trouble it would be to trade gasoline (RBOB) futures directly on the NYMEX.

Is hedging gas prices worth the effort for the average consumer? Probably not. Unless you are especially sensitive to a price spike for some reason, any money is better invested for the long run. But if that’s your goal, your better option would appear to be UGA.

Last week I mentioned comparing your budget with other people around the world. This time, how about comparing your budget to someone living 50 or 100 years ago?

A new article in The Atlantic dissects the information in a new government BLS report 100 Years of U.S. Consumer Spending, focusing on the the differences in spending in 1900, 1950, and 2003.

Source: The Atlantic magazine, Bureau of Labor Statistics

In 1900, nearly 60% of income went towards food and clothing. In 2003, food and clothing are now less than 20% of expenditures. Instead, more than half of income is spent on housing and transportation (included in Other). The percentage of healthcare costs is again deceiving, as today most healthcare expenses are not paid directly by consumers but instead by employer insurance premiums and programs like Medicare.

I don’t wish I lived in the 1900s, as I’m quite accustomed to high quality healthcare and flushing toilets. But we should realize that things are in constant change. Are we properly taking advantage of our mass-produced cheap clothing and agricultural advances? Or are we spending the difference on things we don’t need just to fill the gap? What will things look like in 2050?