A Pew poll from March 2015 reports that more than 80% of Americans are concerned about their savings, and seven out of ten worry whether they have enough money to cover their expenses. Yet since 1960, the personal saving rate in the United States has been inconsistent and generally trending downward, ranging from a high of 17.0% in May 1975 to a low of 1.9% in July 2005, according to the U.S. Bureau of Economic Analysis as reported by the Federal Reserve Bank of St. Louis. In April 2015, the rate clawed its way up to 5.6%.
However, failure to reach financial goals is not necessarily caused by lack of effort or desire. Despite the best of intentions to save money, adhering to a personal budget can just as easily lead to a cycle of deprivation and overspending as it can a hefty bank account.
Some have suggested the reason that Americans live beyond their means is that there’s simply a dearth of available information to guide them. However, a recent survey of Amazon.com indicated the availability of more than 58,000 books dedicated to saving money. Likewise, television and radio shows about saving fill the airwaves, and sample budgets abound on the Internet.
Additionally, 223,400 personal financial advisors provide advice as of 2015, and the field is growing “much faster” than average relative to other professions, according to Bureau of Labor Statistics. It seems clear that there’s another reason budgets are not as successful as they ought to be.
Why Budgets Fail
A budget is a plan to reach a theoretical level of financial health in the future, with a focus on reducing spending and growing income. Budgets tend to fail because they are improperly planned, poorly implemented, or both. More importantly, the roots of failure can frequently be traced to our natural human tendencies that have been evolutionarily hardwired into our psychology.
According to Harvard Business Review, patience and self-control do not come naturally for the majority of human beings, a reminder of the ancient times when life was more uncertain. Waiting to consume a found carcass attracted other scavengers and carnivores, most of whom were bigger, stronger, and more lethal. For our evolutionary ancestors, postponing a meal might have meant becoming a meal. As a consequence, humans have difficulty postponing pleasure today in favor of greater pleasure tomorrow.
Every one of us deals with the temptation of immediate gratification on a daily basis. Just as a bell triggered saliva in Pavlov’s dogs, the word “sale” immediately attracts our interest. Indeed, instant gratification is the basis of much of modern marketing.
Companies like Walmart boast of the breadth of their inventory so you never have to leave a store empty-handed; Amazon.com is experimenting with robotic drones to reduce delivery times; and advertising copy promises benefits that will be achieved immediately after purchase. When the link between sacrifice and payoff becomes uncertain or extended, the difficulty of maintaining self-control – living within a budget – becomes increasingly difficult. One of the primary reasons budgets fail is that the future benefits are often too difficult to visualize, and humans do not have a limitless supply of self-control.
A 2007 study by Florida State University reported in the Journal of Consumer Psychology suggested that self-control operates like a muscle – a reason we call it “willpower” – with a finite capacity that can be used up and must be replenished. Furthermore, exercising self-control in one area leads to a lack of control in other areas. Several studies reported in the Journal of Consumer Psychology involving food and puzzles indicated that controlling one’s impulses to eat a desirable food reduced the test subjects’ ability to solve puzzles. This may be the reason people have difficulty dieting and staying on a financial budget at the same time.
Fortunately, humans operate on automatic or non-conscious response most of the time – responding to our environment without thinking. In his book Thinking Fast and Slow, psychologist Daniel Kahneman theorizes that our brains have two systems: System One is the fast, automatic, intuitive approach, while System Two is the mind’s slower analytical mode where reason dominates. System One relies on mental shortcuts and requires less energy. System Two requires mental effort, is consciously engaged, and can override System One when necessary.
For example, new automobile drivers’ brains operate primarily under System Two, acutely focused on every aspect of their surroundings and constantly making adjustments in speed and steering. Young drivers often comment about fatigue when they finish their practice sessions. By contrast, experienced drivers control their automobile without conscious thought, engaging in conversations with their passengers, changing the radio channels, and so on. System One is in control for experienced drivers unless there is a need during a trip – weather, traffic conditions, mechanical failure – for System Two to be engaged.
Developing a budget and putting it into practice relies heavily on the brain’s System Two, weighing alternatives, projecting consequences, and making decisions. Implementing a budget also requires reliance on System Two until responses become automatic or habitual, and System One can take over.
There are many reasons that personal budgets fail, but giving up too soon is one of the most common. Too many budgeters never let System One take over so that decisions are automatic and near-effortless.
Getting Back on Track
Getting your spending under control doesn’t have to be a painful, drawn-out process. In fact, the more difficult you make it, the more likely it is to end in failure. Employing the following tips during the budget planning and implementation stages can make it easier to work with instead of against stone-age tendencies and can help you make the most of your capacity for self-control. As a result, you should find living within a budget to be easier, avoiding the pain of spending money you do not have and likely improving the chances of reaching your financial goals.
1. Focus on Reducing Expenses Rather Than Increasing Income
Budgets are intended to keep your expenses lower than your income, the difference being the portion you can save for short- and long-term security. However, many people, being dependent on a regular payroll check, can rarely affect their incomes in the short-term.
For budget purposes, presume your income for the coming year will be similar – within 2% – of last year, the only exceptions being a promotion, raise, or bonus you’re certain will happen. If good fortune occurs and you suddenly reap a windfall, the excess income will be a safety factor if you are unable to cut your expenses as quickly as anticipated. Consider implementing money-saving tactics such as using coupons, buying second-hand, and cooking at home instead of dining out.
2. Look at the Big Picture
Consider the effects of your budget as a whole upon your spending habits. Have you exceeded your expected expenditures in every expense category? Has your spending level decreased in total, though maybe a bit less than planned?
If so, you probably had unrealistic expectations about your ability to accommodate significant change. Rather than beating yourself up psychologically and abandoning your attempt to control spending, take pride in your effort and what you have learned.
Revisit your initial budget categories and projections of future expenditures. If your projections were based upon your own historical spending levels, try working off general rules of thumb or guidelines instead.
For example, meeting the following expense ratios can likely save you at least 10% of your income:
- Housing. You should pay no more than 35% of your income toward housing, including rent, mortgage payments, property taxes, repairs, maintenance, and utility costs.
- Transportation. Spend less than 20% on car loans, lease payments, insurance, maintenance and repairs, as well as taxis and parking fees.
- Living Expenses. 20% or less on expenses such as food, clothing, entertainment, and medical costs.
- Debt Repayments. 15% or less, including interest and principal, but excluding a mortgage or car loan.
Guidelines are based upon “averages,” so they certainly don’t apply to everyone. If you based your budget upon recommended guidelines, review your expenditures and amend projections to reflect your lifestyle as you go.
To ease the transition, establish your target ratios incrementally, reducing expenditures in stages until you reach a comfortable target. For example, if entertainment consumes 25% of your discretionary income and you wish to spend no more than 10%, set a target of 21% for the first quarter, 17% for the second quarter, 13% for the third quarter, and 10% for the last quarter. Incremental targets can help reduce the stress of change and allow you to reach your goal in a reasonable period of time.
3. Focus on Fixing Your Failures
Budget failures do not usually occur in all categories – only in a few. In those cases, determine whether the failure was the result of overly optimistic planning or difficulty implementing the necessary changes. Reducing a fixed expense is especially hard and usually takes considerable time, so your primary focus should be on discretionary spending.
Many budget experts characterize all non-fixed expenses as discretionary, a description psychologists would say is consistent with a “want,” rather than a “need.” For example, because humans need protection from the elements, having a roof over one’s head is a “need.” However, the choice of a multi-roomed mansion with a swimming pool, tennis court, and a video room versus a smaller structure would be considered a “want.” As personal income rises, the ratio between needs and wants often decreases. In other words, the more money you make, the more control you have over its use.
Since discretionary expenses can be easily changed, they are often our greatest source of savings. However, there are practical limits to the speed at which change can comfortably occur for everyone. It is unrealistic for a person who dines out each meal to suddenly turn into a full-time meal planner and preparer. A person whose social life is centered around clothes shopping is unlikely to quit visiting malls and shopping centers cold turkey.
A more practical approach would be to establish a target amount to be achieved over a six-month period and incrementally reduce shopping expenses over that period. For example, if your average historical dining expenses are $500 per month, the target could be set at $200, dropping the expense $50 per month over a six-month period.
4. Simplify, Simplify
While there is no limit on the number of budget categories you might use, more than 10 or 12 can increase the chances that you become frustrated and quit. In 2010, the Journal of Marketing found that grocery shoppers who try to track their food purchases in too much detail quickly become frustrated and abandon their efforts. A similar result occurs in tracking budget expenditures in excessive detail because it requires too much self-control.
Review your progress quarterly, rather than monthly, to smooth out the variations. According to the Journal of Consumer Research, budget figures in the short-term are usually very volatile – less so as periods of evaluation increase in duration. Evaluating too early can leave false impressions about your progress, or lack thereof.
5. Include “Fudge Factors” in Your Budgets
Humans have a tendency to want and expect perfection. We expect our budgets to be exact, without flaws or defects. As a consequence, when we fail to reach targeted amounts, we blame ourselves for the discrepancy, escalating feelings of inadequacy and guilt.
Unfortunately, neither nature nor humans are perfect – we exist in a state of constant error and correction. Budget failures more likely result from our misperceptions when creating a budget than a failure to execute. Omitting irregular or unusual expenses that might occur, or treating budget targets as absolute limits rather than estimates, is a sure formula for failure. Specifically, do not account for every dollar of income in a budget – give yourself some leeway for those unexpected expenses that may crop up during the year.
6. Automate Your Spending Where Possible
If living within your budget makes you feel deprived and requires constant, rigorous self-control, you’re likely to fail. The key to living within a budget – or staying on a diet – lies in allowing your brain to operate via System One, the automatic system that directs behavior, to regulate choices as much as possible, rather than having to constantly think and make decisions. For example, establishing automatic payments – transferring money directly from your bank accounts on a predetermined basis – for savings and major expense categories such as housing, car payments, and credit cards can replace monthly decision-making.
7. Create Physical Barriers for Using Credit Cards
Leave your credit cards at home, keeping them available for unexpected expenses or emergencies only. Opening a second bank account and transferring cash to be used exclusively for discretionary expenses – or using cash only – should limit those expenditures each month. In other words, you can spend the allocated amount guilt-free until the account, or your cash, is depleted at the end of the month.
While closing credit card accounts may not be prudent or justified, making their use more difficult can pay dividends. If you need a receipt for record-keeping or security, consider using a debit card from your dedicated spending account or a third-party intermediary like PayPal.
Put your credit cards in a physical location so that recovering them requires time and effort, allowing System Two to come into play and requiring you to make a rational decision about your intended expenditure. In the Christian Science Monitor, Trent Hamm, an enterprising consumer who found himself unable to resist the lure of credit cards, encased them in water and stored them in the freezer – a drastic solution perhaps, but it worked for him.
8. Persist, Persist
Over time, repetitive actions becomes habits, tangible evidence that System One works. Research reported by University College London indicates that the process requires 21 to 66 days or longer, especially for complicated or complex actions. Nevertheless, the mind constantly seeks to replace System Two decisions with the automatic behavior of System One. This tendency is so strong that bad decisions such as overspending are minimized in the habit-forming process.
Despite any lapses in your behavior, returning to your pre-budget spending patterns can eventually cause change. Like most goals in life, success comes to those who persist.
Whenever you overspend, try to determine the causative factors leading to the purchase and whether or not the decision was justified. If you believe it was, review your budget for any necessary amendments. If not, recognize the failure and begin anew to build spending habits using some of the tips mentioned above. Over time, as you incorporate them into your spending, fiscal discipline should become much easier.
While living on a budget can be difficult – especially in the early weeks – persistence can prove successful. Living within your means can not only increase your sense of security, it can also reduce stress and transform money into a tool to help you reach your goals.
At first, adhering to a budget is quite similar to sticking to a diet. Our minds and bodies resist change, even though the end result clearly benefits us. Celebrate your daily victories when you are able to stay on target. When you slip up, recognize that living on a budget is a life change – not a destination. Learn from your mistakes and move on, knowing that persistence is sure to result in habits of thrift and fiscal discipline.
How does budgeting work for you? What challenges do you have to overcome?