Euphoric young indian girl student winner celebrate victory triumph sit at home desk with laptop … [+]
If you want to clear a room of friends fast, just shout, “budget!”A CNBC article titled “People hate budgeting” highlighted that over 60% of one financial advisor’s clients said they felt as though they would “literally suffer” at the mere mention of budgeting.
Why is that? Budgeting is a simple two-step process:
- Create a spending plan that allows you to spend less than you earn.
- Regularly track your expenses to see if you stayed on track.
Given this simple process, why all the budget hate? Perhaps it’s because budgeting is nearly impossible.
Why Budgeting Feels Impossible
A budget tries to create a certain plan for an uncertain future. In a way, it’s like a bride shaking her fists at the storm clouds, insisting, “You shall not rain!” So much of the budget hate we feel comes from moments when unexpected expenses derail even our best-laid plans. Maybe a surprise $3,000 car repair wiped out the emergency fund you spent years building, or your child’s medical bills shattered your progress toward paying down credit card debt.
When we fail to stick to a spending plan, it’s easy to feel ashamed or frustrated. This can lead to a “revenge” spending spree, where willpower breaks down, making shopping or dining out feel suddenly irresistible.
A New Way to Measure Budgeting Success
Budgeting doesn’t have to be this way.
Most people put all their focus on Step 1 (the spending plan), measuring success by whether they stick to it perfectly. This is exhausting and requires willpower that’s hard to sustain. Instead, what if we put most of our effort into Step 2 (tracking) — simply documenting what’s already happened? Unlike spending plans, tracking offers a clear win every time, if you just keep up with it.
With the help of budgeting apps, success in tracking can take as little as 3 minutes a day. Spending plans can never be done with 100% success – they are like hall-of-fame basketball player, Shaquille O’Neal, who often boasted that there was no way to stop him, the best you could do is hope to contain him. Don’t try and stop your spending – it will most likely dunk on you! Instead, focus on a good containment strategy.
For example, every morning, I spend 3 minute a day tracking expenses. One day, I noticed a $25 Amazon subscription — my five-year-old had started talking to Alexa and agreed to a music subscription. I also spotted a $40 bank error in a late fee and saw my fast-food spending climbing more than usual. In 15 minutes, I saved $65 and gave myself valuable mid-month spending check-up.
Carefully Budget Your Limited Willpower
Tracking helps contain spending without rigid control. Behavioral Life-Cycle Hypothesis (BLCH), developed by Richard Thaler and Hersh Shefrin in the 1980s, shows that willpower is a finite resource. People often manage it by separating savings and spending into different “mental accounts” or by automating retirement savings. In the same way, we can manage our limited willpower by avoiding obsessing over a maintaining a perfect spending plan. Instead, we should focus on establishing a quick and easy tracking habit that we naturally weave into our daily lives.
Before my students start budgeting, I ask them to track expenses for 3-6 months. This “bright light” on spending habits changes their behavior without demanding much willpower. They’re often surprised: “I had no idea I spent that much on boba!” Simply observing their behavior makes a difference. Building a daily or weekly tracking habit lays the foundation for a successful spending plan.
Budget Tracking Apps Light the Way
Tracking expenses used to mean paper or a checkbook. Today, with our complex, cashless economy, a budget app connected to your financial accounts makes tracking nearly instant. You can even track transactions while waiting in line at the grocery store!
Last month, our family went camping and forgot our headlamps. That didn’t seem like a big deal during the day, but it sure was when we needed to find the bathroom in the dark! Tracking your expenses is like having a headlamp for your financial life; it lights the way forward.
In summary, if you make tracking a daily or weekly habit, you’ll have a steady “light” as you make financial choices. This approach conserves willpower and leads to better budget outcomes, making the process feel much more fun.