Why Most Budgets Don’t Work
And What To Do About It
Learning to control day-to-day spending is the essential foundation upon which financial wellbeing is built. It doesn't matter how much you earn. If you can't control your spending, you'll find it much harder to get on top of your money. And we all know that living payday to payday is really no fun.
Getting control over day-to-day spending is vital to:
avoiding racking up debt and the stress that goes with it;
being able to handle life's money curve balls and turn a potential drama into a mere inconvenience;
being able to afford those little luxuries, like a takeaway, without feeling guilty;
being able to pay off debt, build wealth and have more choices and fun.
Be Honest with Yourself
At one of my recent virtual events, I asked delegates how they would describe their current day-to-day spending. This is how they responded:
I have a detailed budget and follow it closely - 9%
I have a detailed budget and follow it loosely - 36%
I have a rough budget and follow it loosely - 55%
I have no budget and no idea where my money goes - 0%
I'm sceptical that no one chose option 4, but perhaps that's to be expected. Few people want to admit that they are out of control.
So, which answer best describes your approach?
There is a lot of research which finds that most people know that they should have a budget, but it also shows that lots of them find it really hard to stick to one.
Budgeting and controlling day-to-day spending doesn't come naturally to most people because we make money decisions based on emotions, not logic. And it's so easy to spend with one-click online buying and a tsunami of marketing messages.
But controlling spending is a skill that CAN be learnt over time.
Identifying the Problem
Anyone who is struggling to control their spending is probably suffering from one or more of the following problems:
Lack of attention - Not giving it enough time and attention. One less episode on Netflix a week is all you need to get to grips with spending.
Ignorance - Not knowing where the money is currently going. If you think your spending is just your direct debits and standing orders, then think again.
Unrealistic expectations - Being too optimistic and ambitious or having unrealistic or unsustainable ideas of what can be achieved in the short term.
No system - Not having a system to make it easy to follow.
Ban the B-word
The first thing to do is banish the word BUDGET. That word sounds restrictive, painful, hard work… and boring!
What we need is a SPENDING PLAN and to learn how to manage it and, crucially, how to stick to it.
This is a skill that will take a little time and effort to get to grips with. But it will be worth it.
The people at You Need a Budget have created a straightforward approach to controlling spending. This comprises four key steps:
Give every £/$/€ a job to do - Money coming in must match the money going out. This is also known as zero-based budgeting.
Embrace all your expenses - You must make an allowance each month for all those inevitable but irregular expenses like holidays, car maintenance and gifts.
Roll with the punches - Be prepared to adapt and change your plan if your priorities or situation changes.
Age your money - You need to get to a position where you always have the cash to hand waiting to meet expenses as they fall due.
And Remember…
A spending plan is not a straightjacket. Pragmatism and flexibility are essential.
Be prepared to adapt and change if you need to.
It's OK to change your mind. Life can be messy.
Mistakes are inevitable. Setbacks are to be expected.
Having a spending plan which works will make you financially happier and healthier and, above all, give you a sense of freedom and security, whatever your level of income or wealth.