The 5 Things You Need to Change to Keep from Going Broke
Budgeting isn’t fun.
But that doesn’t mean you can keep avoiding having one. What you need to know is there are right ways to budget and terribly wrong ways to budget.
Today I want to run through a few budgeting missteps I see a lot of people make. If you’ve ever struggled sticking to a budget, likely it’s because of one of these.
Budgeting Trap #1: You Have No Goal
You’re probably thinking, give me a break. Spending less money every month is my goal. If it wasn’t, why would I be reading this? The problem with having a goal like “I need to spend less” or “I need to start saving more” is they’re too vague.
Your goal should follow the classic mnemonic SMART.
Your goal needs to be…
Specific: How much are you going to let yourself spend on dining out this month? Is it $200? $250? Set specific spending limits for each of your monthly expenses.
Measurable: What gets measured gets managed. In order to measure your budgeting efforts effectively, you first need to establish a baseline.
Look at your bank and credit card statements from the last 6 months to a year. Figure out how much you spend each month. That’s your baseline. Now work out your specific spending limits based on that baseline number and your income.
Attainable: If you typically spend $900 on rent and $200 on utilities, don’t fool yourself thinking you’ll keep a budget under $1500 this month.
Budgeting is like steering a ship. You do it gradually and your finances will start to shift in the direction you want.
Relevant: Remind yourself why you’re budgeting in the first place. Are you trying to save for a trip? Retirement? A new car? Write down your goal for having a budget on a sticky note and place it somewhere you’ll see every day.
Time-bound: All good goals have an end date. Yours will likely be at the end of each month. Keep the end in mind so you pace your spending.
If going through all these steps seem like too much work, just do two. Make sure your budget goal is measurable and attainable. If you get these two right, you’ll receive 80% of the benefits.
Budgeting Trap #2: You Tried the Envelope Method And Blew All Your Food Money in Week One
Don’t get me wrong, the envelope method works for some people. What is it? The envelope method is when you pull out cash each month and allocate this money to specific expense categories (separate envelopes). Once you’ve spent all the cash in a particular envelope, you can’t take out more on that expense.
You can imagine how well this works for someone with unattainable budgeting goals…
The fix here is to be flexible. Understand that prices will fluctuate. Gas might be expensive this month, but groceries are on sale. Give yourself some cushion but keep a hard stop on the final monthly total.
Budgeting Trap #3: You’re Anchoring Yourself Into Overpaying for Things
One of the first questions salespeople like to ask is “what’s your price range?”
Most likely, you have a range in mind. The danger here lies in the fact that humans are bad at sticking to their range, and sometimes their range is too high to begin with.
According to a study published in the Journal of Marketing Research, shoppers who set a budget for an individual item are more apt to choose an item at the top of their budget instead of a lower-priced item with the same features.
“Setting a budget puts the focus only on the price of an item,” says Jeff Larson, assistant professor of marketing at Brigham Young University and co-author of the study.
To get around this, you need to go shopping with the mindset of “what features am I looking for?” Then narrow your options to the ones that meet your must-have features. What you’ll find is you end up paying less for something you actually want and need.
Budgeting Trap #4: You’re Relying on Willpower
You’ve heard this before. We all have limited willpower in a day and you have to recognize when you’re running on empty. The reason why is because that’s when you start to make irrational choices with your money.
At 9am you don’t want fast food. But after a long day making decisions at work and for your family, a burger and fries sound pretty good… and not having to cook sounds even better. This kind of behavior adds up over time.
The best way to beat your irrational mind is to take advantage of automation software. For example, if you set up auto-transfers to a savings account whenever your paycheck hits your bank account, you don’t have to think about saving. At the end of the month, when you’re stressed about how much money you have left in your bank account, you don’t have to try and force yourself to save.
To beat your self-indulgent impulses like settling for fast food over a healthy home cooked meal, you need to plan ahead. Meal prep for the week so you don’t have to make a tough decision. You simply pull out a healthy meal, heat it up and stay on track with your budget.
Budgeting Trap #5 – You’re Trying Too Hard Says Cornell University
This last one is a bit disheartening. A study out of Cornell University found that you’re more likely to fail when you try harder to budget.
Researchers watched grocery shoppers make their purchases. Some participants tried to calculate the exact amount they’d be spending before checking out, whereas others ballparked it. The group that tried calculating every item, ended up spending 19 percent more than the other group!
“Those who try to calculate the exact total price almost always do worse than those who just estimate approximate prices,” says Brian Wansink, co-author of the study paper.
The researchers also found that the most accurate shoppers rounded up to the nearest dollar when a price was between $.50 and $.99. “When people don’t round up, it leads to some unpleasant surprises at the cash register” said co-author Koert van Ittersum.
Wansink offered these tips for shoppers:
● Round each item to the nearest dollar — $2.25 becomes $2 and $5.50 becomes $6.
● If you lose track, estimate the total number or items, then guess the price of the average item and multiply them together.
● If you really want to calculate the exact total price, use a calculator.
This last trap doesn’t mean you should avoid trying to budget altogether. It just reiterates point #2 about being flexible and less restrictive with your budget. Avoid these five pitfalls and your budget will succeed.
To a richer life,
Editor, The Rich Life Roadmap