Budgeting is a foundation of personal finance, yet most budgets fail within the initial few months. Despite the best of intentions, many people can’t seem to stick to their budgets, and even those who achieve some form of compliance often report feelings of frustration and stress. I was one of the many who couldn’t seem to get the hang of it until I stumbled upon a system that finally worked for me. In this article, I explore the reasons so many of our budgets break, and I also share a method for steering clear of budgetary shipwrecks.
Why Most Budgets Fail
1. Plans That Are Unreasonably Strict and Inflexible Many budgets are just too darn narrow and unyieldingly unrealistic. They leave almost no room for life’s inevitable unpredictability. When (not if) something unexpected happens, and happens it will, people often resort to abandoning an already abandoned budget. Friedline and West (2016) give this as a reason why many college students are not using a working budget.
2. Unclear and Unattainable Goals
Budgets without clear goals become abstract and meaningless.
“A goal is a specific, desired outcome that a person is committed to achieving. A budget is not a goal but can be a means to an end if it is tied to a clear, motivating, and quantifiable desired outcome. By this definition, I set a lot of goals. All you have to do is stay under the budget until the end of the month. You can spend the money any way you like; it is “avoiding the negative scenario” that is tied to the clear, motivating, and quantifiable desired outcome. Without goals, there is no valid reason to have a budget.
{“Locke and Latham, 2002”}
3. Inadequate Tracking and Feedback
Inability to track current expenses can result in tunnel vision. When decision-makers can’t see the light at the end of the tunnel, they’re much more likely to veer off course. In the context of nudging, the current structure of real-time expense visibility is not favorable for nudging in the direction of wise economic decisions.
4. Overlooking Emotional and Psychological Aspects Money is profoundly emotional. Budgets that pay no attention to psychological triggers and habits often fail because they do not tackle the fundamental behaviors that lead to financial decision-making (Shefrin & Thaler, 1988).
5. Overcomplicated Systems
Users are overwhelmed by complex spreadsheets or applications containing too many categories and abandon them. This has been shown in research involving college students at the University of Michigan and the University of Washington. These students were instructed to keep track of their daily expenses and were given either a simple or a complicated tracking tool to use for two weeks. At the end of the experiment, the students with the simple tracking tool were able to accurately report what they had spent their money on, whereas the students with the complicated tracking tool were not.
The System That Worked for Me: The “Flexible Envelope” Method
After numerous unsuccessful tries, I settled on a flexible take of the tried-and-true envelope budgeting method, reworked for contemporary devices and my way of living.
Step 1: Establish Obvious Priorities and Objectives
I started with a foundation of what I needed to accomplish:
1. Pay down my debt.
2. Build an emergency fund.
3. Decrease the amount of money-related stress in my life.
These were my three big financial goals, and they served as a framework for my budgeting.
Step 2: Use Broad Categories, Not Micromanagement Instead of following numerous tiny categories, I put my expenses into broad envelopes: necessities, optional expenses, saving, and paying down debts. I grouped what’s essential to life, including my mortgage and all kinds of payments, in one envelope.
step 3: Allocate Funds Monthly with Flexibility
With each paycheck, I assigned money to the envelopes. But instead of imposing rigid limits, I allowed for flexibility within discretionary spending: if I underspent in one area, I had the right to reallocate funds elsewhere without feeling guilty.
Step 4: Monitor Expenses with Real-Time Applications I utilized a budgeting application that connected to my banking accounts, providing instantaneous feedback on my expenditures. Observing how much was left in each envelope kept me responsible.
Step 5: Review and Adjust Weekly Instead of waiting for the month-end, I reviewed my budget weekly to adjust my budget for upcoming expenses or unexpected costs. This made a surprise-free month much more likely. I mentioned earlier that I have a pretty routine review process monthly. Reviewing weekly makes this feel very manageable instead of as a big push at the end of the month.
Why This System Works: Behavioral Insights
Goal-Oriented Motivation: Definite aims enhance dedication and tenacity (Locke & Latham, 2002).
Mental accounting: Leveraging how people mentally categorize resources, especially when put into envelopes, helps them with self-control (Thaler, 1999).
Prompt Feedback: Real-time tracking functions as a nudge, steering people toward more deliberate financial decision-making. When individuals see the immediate impact of their choices, they’re more likely to understand that their day-to-day decisions are crib notes for the sum total of their financial lives.
Flexible work arrangements and their impact on stress reduction. Allowing a certain degree of flexibility in work time and place can greatly affect work-related stress reactions in women. Stressful reactions occur when demands work pressures escalate, when work and family conflict, and when individuals feel they lack control over these problems. When individuals have some flexibility in how and when they work, they feel less stress. This is particularly important for working mothers.
Simplicity Increases Reliability: A vast assortment of categories can lead to neglect, but large, shallow groups make it easier to find things and increase the chances of using them over the long run. (Friedline & West, 2016)
My Results
In this system’s third month after adoption:
Discretionary overspending is down by 40%. Why? I cut it down. How much did I cut it down? I cut it down by 40%.
I paid off $3,000 in debt quicker than I thought I would.
Money-related stress decreased considerably.
Rather than feeling restricted by my budget, I felt empowered.
Tips to Make This System Work for You
Begin with concise and significant monetary objectives.
Maintain groups that are large and adaptable.
Utilize technology to monitor expenditures in the present moment.
Check your budget frequently, not just once a month.
Treat yourself with kindness—make adjustments as life shifts.
Conclusion
The reason for the failure of most budgets can be attributed to their rigidity, unwieldy complexity, or lack of connection to genuine financial habits and emotions. The envelope system for flexible budgeting that I adopted combines the structure with the adaptability of a real-world financial plan, the sciences of both human behavior and finance with the engineering of a manageable and effective budget. If you have not been able to maintain a budget, consider this method for a manageable and effective plan that can transform budgeting from a chore to a budgeting ‘toothbrush’. It can do that because it is both a plan with structure and a plan with sufficient adaptability to be effective.
References
- Friedline, T., & West, S. (2016). Budgeting practices and financial well-being: A behavioral finance perspective. Journal of Family and Economic Issues.
- Locke, E.A., & Latham, G.P. (2002). Building a practically useful theory of goal setting and task motivation. American Psychologist.
- Shefrin, H., & Thaler, R.H. (1988). The behavioral life-cycle hypothesis. Economic Inquiry.
- Thaler, R.H. (1999). Mental accounting matters. Journal of Behavioral Decision Making.
- Thaler, R.H., & Sunstein, C.R. (2008). Nudge: Improving Decisions About Health, Wealth, and Happiness.