Budgeting can have some significant benefits and it just comes down to ensuring you are spending within your abilities, while hopefully also putting something away for savings.
Saving is important so that you can achieve your financial goals and purchase big ticket items like a home, a car, or technology like a new phone.
On the other hand, budgeting ahead for an emergency savings fund is crucial because the unexpected is always lurking just around the next corner. Things like unforeseen medical expenses, home or vehicle repairs, career or educational opportunities, and changes to the family make up are bound to come up sooner or later.
Yet, 34% of Americans, over 100 million people, have $0 saved up. Moreover, the National Institute on Retirement Security (NIRS) reports that 66% of millennials have not yet started saving for retirement, and budgeting can help.
So what makes budgeting so difficult for so many, and how can you get started?
Understanding the Psychology of Budgeting
Budgeting is a process of creating a plan to manage your income and expenses. The primary goal is to allocate your money in a way that enables you to achieve your financial goals. This process comes down to two psychological factors: discipline and self-control.
Psychologically speaking, discipline is the ability to stick to a plan even when faced with temptations, distractions, or obstacles. Whereas, self-control is the ability to regulate your thoughts, emotions, and behaviors to achieve a desired outcome. This involves managing impulsivity, resisting temptation, and overcoming procrastination.
Budgeting requires both discipline and self-control because it involves making trade-offs and sacrifices in the short term to achieve long-term goals. For instance, budgeters may need to cut back on areas of instant gratification like eating out, expensive memberships, or retail purchases to save money, and that takes a lot of mental and emotional work.
Discipline and self-control can be especially challenging to maintain when facing external pressures, like social norms, peer pressure, advertising, and of course, the lifestyles portrayed over social media. This is why it is essential to understand the psychological mechanisms that support budgeting and compassionately remind yourself that often the best choice is long-term stability before momentary satisfaction.
Why Budgeting Works
Budgeting can provide numerous benefits, both tangible and intangible. Here are a few reasons why budgeting works:
- Budgeting can help you reach long-term financial goals: Budgeting enables you to prioritize your spending and allocate your money to achieve your financial goals, like having a happy retirement, buying a home, or living debt-free.
- Reduces financial stress: Having a plan and knowing where your money is going, can help to clear up stress and uncertainty around where your money is going and what you are working toward. A budget can also alleviate financial stress by providing insights on where you could be overspending, why you are accumulating debt, and whether you are heading toward a financial crisis.
- Increases financial security: Budgeting can help you build an emergency fund, save for unexpected expenses, and prepare for financial emergencies. When it comes to big-ticket emergencies, it is not a matter of “if” but “when.”
- Enhances your self-control and discipline: Budgeting requires you to exercise self-control and discipline, and by practicing these techniques, it can lead to improvements in your overall mental and emotional well-being. You may also find your confidence is growing through the sense of self-accomplishment and self-accountability that comes with setting goals and sticking to them.
- Improves your relationship with money: By understanding your spending habits and values, you can develop a healthier relationship with money overall. For many, money itself can be a scary subject, but knowing more will truly help to alleviate some of this tension. Greater financial literacy will also help you to align your spending with your values and priorities, increasing your sense of fulfillment and happiness.
How to Make Budgeting a Habit
Budgeting can be challenging, especially if you are not used to tracking your expenses or making a plan. However, there are several strategies you can use to make budgeting a habit:
- Set realistic goals: Start by setting goals that are conducive with what is realistic for you. For example, if your goal is to save for a down payment on a house, break it down into smaller milestones, such as 10% of every pay cheque. If the constraints are feeling too tight, then reduce the amount, but don’t give up.
- Track your expenses: Many find success by using a budgeting app or a spreadsheet to track your expenses and income. You could categorize your expenses into categories like housing, transportation, food, entertainment, and savings, and compare them to your income.
- Make adjustments: Review your expenses regularly and make adjustments as needed. If you are overspending in one category, find ways to reduce your spending or allocate more money to that category. The goal isn’t to live restrictively, because above all, your budget has to be sustainable or else you’ll never be able to stick with it.
- Automate your savings: Set up automatic transfers to your savings account or retirement account. This way, you can save money without thinking about it, and it becomes a habit.
- Clear out your debt: Consider consolidating your debt with an all-in-one or collateral loan. This way, you can relieve the stress created by debt and start building your savings from the ground up.
- Reward yourself: Celebrate every now and then! After all, you are budgeting to create a better life for yourself, and yourself deserves your utmost thanks for that! Maybe a few times per year you can dig into your savings to buy yourself a treat, or create a subsection within your savings budget for periodic rewards.
Budgeting can take some getting used to, but once you get used to it you will see how worthwhile it is. After all, every journey starts with the first step.