Budgeting

Kim Sare

23 Sep 2024

Why is budgeting so challenging?

Typical conversations about budgeting go something like this:
 
Advisor
Budgeting is really important. In fact it’s key to your financial future.
 
Client
Thanks, but how exactly do I…
 
Advisor
You just need to stop spending so much money. Your future self won’t thank you if you don’t.
 
Client
I have tried before but. I just never seem…
 
 Advisor
 It’s just a matter of self-discipline. Look. Here’s a really simple 10 page spreadsheet.
 
No sh*t Sherlock.
 
Everyone knows that budgeting is important, they know it would help their financial future and they know they should do it.

So if knowledge isn't the barrier, what is?

There is solid evidence from Psychology that self-control, self-discipline and willpower are limited resources that become exhausted if we over rely on them (Baumeister et al, 2007).
 
Traditionally budgeting requires big changes, ongoing acts of self-discipline and significant denial which for most people are unsustainable expectations.
 
Melissa Browne, author of Budgets Don’t Work (But This Does) argues that there are four ‘money types.’ eg ‘The Worker’ who might spend without full consideration due to a lack of organization or time and ‘The Creator’ who has a dislike for data and may therefore tend towards financial denial.
Our money type (deeply rooted in our Psychology) results in specific budgeting challenges, so applying a ‘one size fits all’ approach without deeper understanding and a tailored approach sets people up to fail.
 
Understanding your money type allows you to approach personal finance with more self-awareness. Rather than forcing yourself to conform to a rigid budget that may not suit your personality, you can develop financial strategies that align with your habits, emotional drivers, and life goals.

If you still need convincing...

BJ Fogg is a behavioural scientist at Stanford University. He emphasises the importance of “tiny habits.” The model suggests that enduring behavioural change is best achieved by starting with small, easy changes that can be gradually built upon. This approach helps in forming new habits without overwhelming oneself. This couldn’t be more pertinent than in the case of budgeting. So here’s an example of how a small habit shift can mount up…
 


Elle is a 38-year-old solicitor who travels to work by train. Lets say a latte costs £4.25 and she grabs one at the train station each morning, each workday, five days a week.

Her company offers a generous holiday entitlement of 35 days holiday plus a few sick days here and there, so she buys 220 coffees a year, which is £935 a year.

Starbucks coffee inflation is typically higher than general inflation, so assuming that this goes up by 4% a year, so let’s say each coffee 30 years later cost £7.46 – £1,642 a year.
 
If instead Elle saved the same amount in a tax-free account which pays 4% compound interest a year, she would accumulate £48,300 by the time she’s 68.

Some practical budgeting tips. Here's what we know works.

It’s fair to say that Chloe had always struggled to save, despite having no mortgage and a six-figure salary.

 

😭 “I just never seemed to be on top of my money, I always felt out of control”

 

What Chloe found that finally started to work was fully utilising available technology. There are loads of other similar options out there, but we love Starling and suggested she start using this award-winning challenger bank and their highly functional budgeting functions.
 
We thought it might help, because once set up technology helps ensure consistency and reduces the need for ongoing conscious self-discipline.
 
Chloe found the following two things most valuable.

Tip 1 - Tracking is power. Know your disposable income.

If you want to avoid overspending it’s imperative you know your disposable income. Use different ‘savings spaces’ in order to achieve this.

 

💰First Chloe set up her ‘Bills’ saving space. As soon as she was paid, enough money to cover all of her committed monthly expenditure was automatically transferred into this space and forgotten about.
 
🥱 Next, she created spaces for the dull stuff she knew would probably arise at some point during the year. For example, her car maintenance fund. She estimated the likely costs and siphoned off enough every month so it was there as and when she needed it. If you get lucky and this money isn’t required, then happy days, extra for the holiday fund.
 
😎 Lastly she had spaces for the discretionary stuff she planned to do and for money to invest. She has a Campervan Build fund, a Bali fund and an ISA space. Chloe set savings targets for each space.

 

Once set up this largely mitigates the need for ongoing self-discipline and what’s left in your main account is your disposable income to do with as you please.
 
Being able to see precisely what that balance is makes it less likely for you to overspend. Some clients find this has been the magic formula which moderates their spending behaviour.

Tip 2 - Trick yourself into saving.

Chloe’s favourite feature on Starling was the ’round up’ feature. On one of the spaces (she used it on her Christmas space) you can tell the app to ’round up’ every transaction you make to the next pound and distribute the difference into your chosen space. 

If you spend £4.05p it rounds that up to £5 and 95p goes into your designated saving space. You can even tell this to 2, 5 or 10 X the roundup amount to get to your savings goals quicker. You really don’t notice it happening and before you know it you have the money for your next weekend away, or whatever.

How else can we help

For our ‘Fully Guided’ clients, we:
 
  • Assess your money type
  • Create a budgeting strategy that suits you
  • Have quarterly budgeting checks in’s to ensure you stay on track

Where else can you look for help

You can take Melissa’s money type test here for free: https://www.melissabrowne.com.au/moneytypequiz
 
 
Here is a useful article which suggests 6 different budgeting strategies:
 

References

Fogg, B.J. (2009). “Tiny Habits: The Small Changes That Change Everything.”

Baumeister, R.F., Vohs, K.D., & Tice, D.M. (2007). “The Strength Model of Self-Control.” Current Directions in Psychological Science, 16(6), 351-355

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