Our guide to developing a successful personal budget
A good budget should be the foundation for achieving our financial goals. But all too often we abandon our budgets at the very first obstacle, meaning they're simply not worth the paper – or spreadsheet – they're written on.
So what makes it so hard to keep to a personal finance plan and how can you give yourself the best possible chance of succeeding?
The psychology behind failed budgets
For many people, failing to stick to a budget doesn't stem from any obvious failure in the planning or preparation, but from a deep-seeded belief that they simply don't deserve to achieve their financial goals. That's according to psychologist Rachel Clements from the Centre for Corporate Health.
"How often are we told that 'money doesn't grow on trees' or something similar, which suggests that finances should always be a struggle? That's the belief we can take with us into our savings plan," Clements says.
"But if your underlying beliefs are not aligned to your goal, it's not going to be achievable or sustainable no matter what you do," she says.
So Clements argues that the first step in any successful budgeting plan is to step back and look at our own attitudes to finances. In doing so, we need to accept that there is nothing wrong with managing your money successfully and that, by making the right decisions and showing a bit of discipline, we're worthy of reaching our financial goals too.
But if your underlying beliefs are not aligned to your goal, it's not going to be achievable or sustainable no matter what you do.
A moving of the mind
Even once we've addressed our own attitudes to personal wealth, Clements says that sticking to a budget requires a conscious behavioural shift. In that sense, it's no different to having a plan for achieving any other goal.
But she says that getting the behavioural change that's needed to make a budget work requires consciously re-programming our minds about who we are and what we're like.
"We all have a comfort zone and when we leave it our body has a strong reaction and we want to be pulled back in," Clements explains. "Although this might sound strange, a lot of people are comfortable when they're not in control of their finances."
But convincing your mind that you're a different person isn't easy, especially if you try it all in one hit. For that reason, Clements suggests getting it use to the changing behavioural shift by starting with – and achieving – small goals along the way to achieving larger ones so that our mind sees that we're doing well.
"As humans, we like to get reinforcement that we're doing the right thing," Clements says. "It's like people who set out to lose 10 kilograms. It's so much easier when they weigh themselves at the end of each week to show they're heading in the right direction."
Making goals specific and meaningful
Speaking of which, Clements suggests that you will stick to a resolution of any kind more easily if you're working towards something tangible.
That means a key part of making any budget work is to tie your milestones to meaningful and specific financial goals. For instance, having a goal of saving $500 a month for a $6,000 holiday to Fiji in 12 months is more concrete and therefore more achievable than simply aiming to save $500 a month for a year – even though the two require exactly the same budgeting.
Be realistic and precise
Another, more practical, reason budgets often fail has nothing to do with psychology and more to do with maths. Put simply, sometimes the data that goes into building them isn't right.
For instance, if you're budgeting for how much to spend on power, and you base your figures on last summer's bill when the heater never went on, you'll have a distorted view of how much you need to spend each quarter. To get an accurate record you really need to go back over at least 12 months' worth of bills.
Alternatively, budgets sometimes fail because we're simply too hard on ourselves. In fact, one study in the Journal of Consumer Psychology1 found that our self-control can actually get worn out if we use it too much. We might be saving for a specific goal but we do need to have a little fun too. So make sure you factor in things such as holidays, eating out, movies and other entertainment too: or even better, tie these treats to your savings goals along the way.
It's also worth remembering that things rarely, if ever, go according to plan. For this reason, it's important to factor in a buffer that can be used for car or home repairs or for that large bill you didn't see coming.
Consider the possibilities
At its heart a budget is all about living within your means to achieve your financial goals. And if you find your means are grander than you're allowing for – or if you want to save for something that you can't afford no matter how you play with the numbers – you really have two possibilities: scale back or bring in more money.
If you're not prepared or able to scale back, you'll need to look at ways to potentially create a second source of income away from your primary work: whether that's a new or second job, a business on the side or an income-producing investment.
Nobody is perfect. There will be times when we stray from our budget: whether that's because we get carried away on a night out with friends or buy something we probably shouldn't have.
So don't be too hard on yourself when you fall off the horse. After all, a dollar here or there won't cost you, so long as you don't do it too often. Just get back to your savings plan and start again while things are still salvageable.
Your budgeting checklist
If you're setting up your own budget, here are the questions you need to ask yourself first:
- What am I saving for?
- What milestones will I hit along the way?
- Is my data accurate?
- Have I factored in what will happen on a rainy day?
- Am I being too hard on myself?
- Will I bring in enough money to stick to this budget?
- What will I do if I stray from my goals?
And if you want to enlist some professional help, a financial planner can help tailor a budget to you that will help you reach your financial goals.