Budgeting is one of those deceptively simple things to do. If I asked you whether you know how to budget, chances are you would say yes! After all, the math of it is pretty simple – spend less than you earn. And yet, research shows that 85% of people who have a budget, don’t stick to it.
Which begs the question: if we all know HOW to budget and WHAT we need to do in order to save money, why don’t we?
At this point you’re probably thinking to yourself “well Tash – the answer is pretty simple – we aren’t earning enough to pay our bills”. While I will agree that the increasing pressures on households with cost of living and the fact that it has been years since any of us got a pay rise will of course contribute to the problem, ultimately these factors are not the reason more of us don’t save.
Behavioural finance tells us that the ultimate reason we struggle to budget, regardless of our income level, is because the way we spend our money is more emotional than it is rational. So as much as we know we should save and our rational minds want to save, we often wind up blowing our budgets anyway!
Here are five very common mistakes that we tend to make, and what you can do to overcome them.
Mistake #1. We wait for the stars to align
• “I don’t have time today, I’ll start tomorrow”
• “I have too many bills this month to save”
• “I really blew my budget this week, so I will start again next week”
I think it’s safe to say we’re all guilty of this kind of procrastination (whether it’s our finances, our diets or something else).
Solution: There’s no time like the present. Carve out time in your schedule this week to work on your finances and make a pact with yourself to stick to it.
Mistake #2. We run our finances on autopilot
If all you are doing is reacting to the bills coming your way, and spending money without any real long term plan, then you are going to struggle to get ahead.
Solution: Set a SMART lifestyle goal which you can break down into a weekly saving target. Then review your spending for the last three months to get a clear idea of your living expenses. If there isn’t enough room in your cashflow for your saving goal – brainstorm some ways to bridge the gap.
Mistake #3. We overcomplicate things
I used to have fancy spreadsheets forecasting my cash flow and I spent hours calculating what bills were coming in and when, and how much to put aside. Unfortunately, there were three downsides to this approach:
- It was time-consuming, so I would often forget to do it.
- Because I routinely forgot to update my spreadsheets, I often ended up spending the ‘extra’ cash left over each fortnight, instead of saving it.
- When the bills eventually came in, I didn’t have the cash to pay them (because I had spent it), which meant I had to rely on my credit card.
Solution: Arrange to put all of your bills on a fortnightly direct debit payment plan (commonly known as bill smoothing). So rather than paying your bills on a quarterly or yearly basis, you arrange to pay them on a fortnightly or monthly basis (depending on how often you get paid). With minimal effort you will be able to avoid bill shock and know exactly how much money is left for day to day spending on things like petrol, parking, groceries, clothes and dining out.
Mistake #4 We try to save what is left over
Have you ever decided that you are going to save as much as you can this month but hard as you tried not to spend your entire pay the balance somehow always approached zero by the eve of pay-day? You are not alone.
Solution: Make your savings a non-negotiable and treat them as a bill. Decide on a regular saving target and arrange for your employer to automatically pay this amount into an online savings account that you won’t touch. As the saying goes, out of sight, out of mind.
Mistake #5 We underestimate the power of our emotions
It might sound airy fairy, but I assure you it’s not. In fact, this is the big one. Research has shown that it is not our pay cheque that determines how well we manage our money – it’s our psychology and our emotions. One of the biggest challenges with sticking to a budget is our impulse (or unplanned) spending and our emotions have a lot to answer for. We feel bored, we spend. We feel happy, we spend. We feel sad, we spend.
Solution: Track your impulse spending for a week and note down the item, amount and the emotion behind the purchase. By identifying the prevailing emotion and the underlying cause you can begin to identify a common pattern and explore some strategies to address the issue.
As you can see, in order for you to really change your financial direction, the one thing you need to do is identify what financial habits and beliefs have been holding you back and work on forming some new habits with money.
Natasha Janssens
Natasha Janssens is a Certified Money Coach (CMC)® and founder of Women with Cents. She is an award winning finance expert with a passion for supporting women to transform their relationship with money. If you don't know what you don't know when it comes to money and financial matters, her book Wonder Woman's Guide to Money is for you. If you would like to work with Natasha, take the Money Type Quiz and book a quick get-to-know you call.