Budgets Do Not Work (for most of us), And Here’s Why

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If you do budgets, you can probably relate to this struggle; Armed with fresh optimism (the new year especially does this to us), you decide to get your finances in order. Finance people say that the first step is to come up with a budget.

Step 1:  You sit down and come up with a budget based on the best version of yourself. You list your needs and compulsory bills, throw in some wants and of course some saving – because the point of a budget is to save you some money. Depending on how detail-oriented you are, you allocate your money across categories, setting spending limits.

Step 2: You need to figure out a way to track your expenses, so you ask your social media friends for recommendations for spending trackers. The recommendations are many, but you pick one and input your budget limits onto the app.

Step 3: You step out into the world armed with your app and for the first couple of weeks or so, it works. You are sticking to your budget.  The reminders of how much you have remaining in each category are really helping with this, especially because all the categories still have decent balances.

Step 4: Something you had not planned for comes up. It can be as serious as a medical emergency, or as fickle as getting to the supermarket till and realizing that your shopping exceeds your budget limit for that category. You “break bank” and resolve to pick right up the next month.

The next month comes and something else comes up, or the budget starts to feel restrictive. After a few tries, you give up on budgeting for the year, or forever.

Budgets don’t work!

This is true. Budgets do not work for most of us – there is a small category of people who are able to make and stick to budgets, and this has more to do with their personality than their finance skills or knowlege. Believe it or not, even I do not follow my budget 100% of the time.

Budgets fail us for a number of reasons:

1. Often our budgets are based on the ideal. It is no coincidence that we usually create budgets when we are feeling bad or anxious about our finances. A budget is a self-improvement tool that is supposed to guide to manage our money better. As such, when budgeting, we tend to ignore how we have been spending our money. We ignore our habits, life patterns, our money personalities and so on, and create an entirely new template that we intend to use moving forward.

This approach to budgeting is almost like getting off the couch and running a half-marathon without training. It will most definitely break you.  In the same way, the “new me” approach to budgeting breaks us. It demands us to change too much too soon, and it is no surprise that it does not work.

2. We are human, and sh!t happens: Budgets are created with the assumption that we are perfectly rational, and life will happen as planned. Neither of these two things are true. A good example for me is supermarket shopping. While I do have a budget for groceries, I will sometimes go to shop, only to get to the till and realize that the shopping will exceed my budget (this happens in Week 3 or 4 of the month). A perfectly rational person would return the extra items. But I am not perfectly rational, and the extra item usually is wine 😊.  I usually “borrow” from another category, then promise to “repay” it the following month. This is a slippery slope we know all too well. In addition to our irrationality, life is unpredictable. Even with an emergency fund in place, things happen that throw our finances off course, and cause us to diverge from our budgets.

3. Budgets can feel restrictive. Often, sticking to one’s budget demands that we do strange things like taking the wine back to the shelf because you do not want to exceed your spending limits. Doing this often can start to feel like you are a slave to your budget and can rob the joy out of spending money.  A budget that is too restrictive takes the spontaneity out of life,and it is no surprise that it then becomes difficult to follow through.

Ultimately, my problem is not with budgets per se, but the feelings of failure and helplessness they evoke in us when we fail at following them. It is not our fault that budgets fail – it is a tool that is not ideal for many personality types. Does this mean we should just go blind, spending money until it is finished? Not at all. The next post looks at what to do if you cannot stick to a budget, and suggests alternative budgeting methods.

Have budgets worked for you? Please share tips in the comments section. If you have struggled to budget (like I have), which of the three reasons resonate with you, and what have you done to counter the challenges?