Many of us have probably had a similar experience. You spend hours drawing up the perfect budget, neatly fitting in all your expenses, and maybe even squeezing in some savings to go towards something you’ve always wanted to buy or do.
All seems well for the first few weeks and then the wheels start coming off…
So why even go to the effort of setting up a budget if it is doomed to fail? In this blog we look at when a budget works, why they often don’t work, and how a budget can benefit even those of us who struggle to stick to one.
When doesn’t it work?
Most of us can stick to a budget for a few weeks, but then get tempted to spend money on something outside the budget, possibly by drawing on savings. This is usually validated with: “I’ll put the money back next week.” Unfortunately, this rarely ends up happening.
What can also lead to a failing budget is the feeling that we aren’t making enough progress for the effort being put in and sacrifices made. Then eventually we decide that the goal we are working towards can be put off for a while, or might be easier to achieve later in life.
The five main causes we see for a failing budget are:
Losing interest - We often lose interest in following a budget, which results in it unravelling over a few months. This loss of interest happens as our initial enthusiasm fades, or if we don't see results usually due to not sticking to the budget.
No fun - We often only budget to survive. i.e. budgeting for bills and living expenses. A budget needs to allow for the lifestyle you want to live and/or goals you want to achieve. Without these things we won't see any value in having a budget.
Complexity – A budget that is too complex, with many spending categories, can become very difficult to track and stay on top of. This type of budget can also be thrown out quite easily if we overspend a little bit in one area, resulting in other areas of the budget not being met.
A static budget - There are constantly changes in our lives, be it career, income, kids, buying a house or anything else. These changes can also change what's important to us. A budget needs to adapt to these changes otherwise it won't deliver the results you want.
Chasing benefits – We often see the use of credit cards or complex banking structures that are used to get benefits, for example Frequent Flyer Points. Although these appear attractive, the only reasons companies offer these are because they know they will make more money off us than the value of the points we get. Chasing these benefits eventually causes us to get stuck in a cycle of using credit cards, and then not having enough money to pay back the loan, leading to additional spending on the credit card.
How do we make it work?
Goal planning session – This is possibly the most important step in our Financial Coaching process. We spend a lot of time helping clients discover what their goals are, making sure these are their own goals and not someone else's, and ensuring these goals match up with what the client values in life. By discovering these goals, and incorporating them into the budget, the client becomes driven to stick to their budget.
Lifestyle – We ensure that lifestyle expenses form part of any budget. This means that the budget is not just a means to make sure bills can be paid, but also that you can enjoy life the way you want to.
Structured cash flow – Setting up different bank account for different purposes, and having automatic transfers between them helps ensure you don't overspend in any areas. For example, automatically transferring the correct amount into a 'bills' account each week, and only using the account to pay bills ensures you are always able to meet these commitments.
Continuous adjustment – We consistently review a budget to account for any changes in circumstances and also to look for opportunities to better utilise cash flow.
Accountability – We hold clients accountable for their spending by checking in with them regularly, and following up on any unexpected spending. Having an independent party checking up on you is a crucial part in getting the budget to achieve what it is meant to. Budgeting software is also a great way to track your spending and make sure you stay on track. Some examples are: Moneysoft, Pocketbook and Pocketsmith.
Start by setting up a basic budget (click here for a template), including some lifestyle and personal goals. These will give you a sense of reward when you achieve them and keep you motivated to stick to the budget.
Continuously tweak your budget and look for opportunities to better utilise your cash flow. Also review your budget when there is a change to your situation, such as career, relationship, buying a home, having kids, etc.
Budgeting is something we help many of our clients with, and it's something that can have a big financial impact over a relatively short timeframe. If you are interested in discussing our Financial Coaching service feel free to contact us, or to make a booking through our website.
Disclaimer: The information provided in this presentation is of a general nature only. It does not take your specific needs or circumstances into consideration. You should look at your own personal situation and requirements before making any financial decisions. Please seek personal financial advice prior to acting on this information.