Where Budgets Fail Us – and How to Fix it!

I am a big fan of a budget. It gives us an idea of what we should spend in order to hit financial goals (whatever those might look like for you). But, budgets don’t work for most people. They are usually not written down (they’re in “our head”), but more importantly they aren’t based on your actual spending patterns. Behavioral finance shows us that the recall bias significantly distorts our perceptions of what we’ve actually spent so you have to start by tracking expenses and then finding ways to trim that back into a more targeted budget.

Another big issue is that we can’t stick to them. In software development, they call an app “sticky” if we keep using it. So, how do we get our budgets to become sticky? That’s one thing we need to work on.

But, did you know that our budgets fail us the most because of 2 main reasons? Both of which you can quickly address with some intentionality.

  1. Ignore the last 20 yards. In any store, try to ignore the last 10-20 yards between what you came in to purchase, and the checkout register. That last little bit is where all stores make their money on impulsive purchases. Ignore the over-priced electronics, the candy you don’t need, and whatever else catches your eye. Retailers are great at planning their space based on behavioral finance. If you plan in advance to ignore that section – and stick to it – I assure you that you will spend less!
  2. Invest in yourself first. Most people develop a spending budget where they receive their paycheck and spend whatever they need/want for that month. Only then, based on what’s left, they might make a decision to start investing, saving for a goal, or adding to retirement. Flip that model: put money aside into a simple growth-oriented investment and retirement at the beginning of every month – only then spend what is remaining and on your target budget.

Budgets fail because we have emotional attachments to money. But, used correctly we can make the budget a great tool.

#mindfulmoney, #budget, #wealth


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