I admit that budgets are great. With a budget, you know exactly where you spend money and can change your habits accordingly. But here’s the thing about budgets: they fail.
Thankfully, budgets aren’t necessary. I’m horrible with budgets and yet I managed to save about $20,000 in 1 year when my income was only about $50,000.
But what’s the reason why budgets fail?
I’m not the only one.
Budgeting is like dieting and exercising — it’s something that you know you should do and yet you can’t do it, even after multiple attempts.
Don’t feel too bad. It’s only human to fail at budgeting. This is a scientifically-proven fact.
Fact #1: we’re bad at predicting our own behavior
A 2009 study of Canadian undergraduates found out just how bad people are at budgeting.
The students tracked their spending before the study and reported that they spent $126 during the week.
The researchers then asked students to estimate how much they would spend over the following week. The students predicted a spending of $94, but ended up spending $122. The next week, they continued to predict a spending of $85 and failed just as badly.
And the kicker: the students who were trying to save money predicted a lower spending than the others, but ended up spending just as much.
Fact #2: we have limited willpower
Sticking to a budget is tough. It’s not just a one-time thing; throughout your day, you have to keep track of your spending and restrain yourself from buying stuff. You could have a dozen internal battles in your head before the end of the business day. It’s tiring.
A 2007 paper published in the Journal of Consumer Psychology suggests that, just like muscles after strenuous exercise, our self-control could get “depleted” if we use it too much.
This has been shown to be true in several studies.
In one study, the subjects were divided into two groups. One group was instructed to not think of white bears. Next, both groups had to watch a funny movie and resist laughing. The no-white-bear group, having used up some of their self control, were less successful in resisting laughter.
In another study, one group of subjects were tempted with chocolates and cookies, then made them solve difficult problems. These people gave up on solving the problems faster than the control group.
Once we’ve used up our self-control, we tend to make “self-indulgent” decisions like buying candies instead of granola bars. In the same way, using up self-control on budget efforts could result in spending sprees and lowered performance in other areas of life.
Fact #3: we try harder and do worse
This one is depressing: according to a Cornell University study, you’re more likely to fail when you try harder to budget.
The researchers followed grocery shoppers as they made their purchases. Some of these shoppers tried to calculate the exact amount they will spend, while others just made rough guesses.
The result? “Those who try to calculate the exact total price almost always do worse than those who just estimate approximate prices,” says Brian Wansink, who co-authored the paper.
These shoppers went as much as 19 percent over budget.
Now that we know why budgets fail…what’s the alternative?
Budgets aren’t exactly doomed to fail. It doesn’t work for me, but many people manage to use budgets successfully.
If anything, these studies show that budgets should be less restrictive.
1. Don’t try to predict your spending by picking an ideal amount of money. Use a more realistic approach. Check your bank statements to see how much you typically spend and go from there.
2. Don’t make a budget that’s difficult to stick to. Pad it a little bit for emergencies and fun times so you don’t deplete your self-control reserves.
3. Don’t get too bogged down with details. Does it really matter much if you spent $9.49 or $8.99 on snacks? Look at the big picture and go with rough estimates.
If budgets still don’t work for you, then maybe you want to try what I do to save without a budget:
- Pay myself first: automatically save some of my money and live on the rest.
- Focus on my three biggest expenses.
- Eliminate or minimize regular bills.
- And sometimes, when the mood strikes, do these other little things to reduce my spending.
A little announcement
As of today, I’m joining a network of personal finance bloggers called Yakezie. This means that I’ll be getting to know some nice people and I’ll also be trying to improve my Alexa rank. :)
Images: 1. 401(K) 2012 (CC BY-SA 2.0 License); 2. whologwhy (CC BY 2.0 License); 3. 401(K) 2013 (CC BY-SA 2.0 License); 4. J.B. Hill (CC BY-2.0 License); 5. R. Nial Bradshaw ( CC BY 2.0 License); 6. Tax Credits (CC BY 2.0 License).