As someone who’s interested in managing your personal finances, you’ve likely heard the trusted advice that budgeting is a critical part of achieving financial success. Yet, like many, you might find the whole process of budgeting to be very difficult. Similar to starting a diet, you might begin your journey with optimism but soon find yourself off track, wondering why it’s so hard to maintain. If this sounds familiar, don’t be too hard on y
ourself as this struggle is quite common. Understanding why your budget isn’t working can be the first step to mastering your financial independence.

The Importance of Budgeting

Budgeting is widely recommended by financial experts because it helps you to track income and expenses, identify areas of overspending, and recognise how much you need to cut back or increase your income. This process might seem restrictive, but it is essential for aligning your spending with your long term financial goals. Consider the example of billionaire investor Mark Cuban. In a 2023 interview with
GQ, Cuban disclosed that even after selling his company and having millions in the bank, he continued to keep a strict budget every day. This underscores the importance of financial discipline, regardless of income level, and knowing exactly where your money is going in order to, not only build, but also maintain wealth. We’ve established that budgeting is beneficial, then why isn’t budgeting working for you? If you find yourself living from paycheque to paycheque despite budgeting, keep reading as we explore the reasons behind budget failures and examine four ways to make it more effective.

Make a Realistic Budget

One of the most common reasons budgets fail is that they are not tailored to suit your individual needs, circumstances, and comfort levels. A popular budgeting method is the 50/30/20 model, where 50 per cent of your income goes towards needs, 30 per cent goes to wants, and 20 per cent to savings. However, this model may not be ideal for everyone. For instance, if your essential expenses, such as rent, already consume 50 per cent of your income, there might be nothing left from the needs category to do other things, for example, pay down high-interest debt. In such cases, you might find yourself using money from the ‘wants’ category or dipping into savings, which overtime undermines the purpose of the budget, which may frustrate you and cause you to give up.

Instead of blindly following some allocating methodology, you can customise your budget and allocate your funds to fit your unique financial situation. This might mean that you start by allocating less money to wants or start with a lower savings rate, such as 10 per cent, and gradually increase it over time to 20 per cent as your income increases. While you may not save as much as you like initially, the discipline that comes from paying yourself first will benefit you significantly because the habit of saving, once established, is a solid foundation on which to build. It will make the transition to 20 per cent easier when your income permits it.

Your budget should not be a shackle, nor should it be a document that doesn’t serve you such that it becomes one that you ultimately won’t adhere to. If your budget is unrealistic, it may lead to frustration and abandonment. Therefore, to avoid this, ensure that you are creating a budget that is realistic and flexible enough to accommodate unexpected expenses without derailing your financial goals.

Update Your Budget

Another reason your budget might not be working is that you haven’t updated it to reflect your current financial reality. Given that the economic landscape has changed drastically over the past few years, if your budget still reflects pre-pandemic expenses, it is time for a reassessment. For example, the cost of groceries has significantly increased due to inflation and if you haven’t adjusted your budget, you might find yourself overspending. Additionally, significant life changes such as starting a business, adding a new family member, or separating from a partner can also dramatically alter your financial situation. As such, these changes require that you revisit your budget and make the necessary adjustments. In any case, it is always wise to update your budget, at least annually, whenever there are shifts in your personal circumstance or the cost of living, to ensure that it remains relevant and effective.

Track Your Expenses

Failing to track your actual expenses is a major reason budgets fail. Many people may know their fixed expenses like rent and utilities, but have little idea where the rest of their money goes. A 2020 survey by global financial management platform, Intuit, found that 60 per cent of respondents didn’t know how much money they spent the previous month. This lack of awareness leads to overspending and missed savings opportunities. Tracking expenses doesn’t have to be complicated. There are numerous budgeting tools, some free of cost, that can help you monitor spending and categorise expenses. By keeping a detailed record you can identify and modify your spending patterns, like frequent dining out or impulse purchases. Without tracking, it is easy to convince yourself that you are adhering to your budget, while actually drifting further away from it.

Pay Yourself First

A critical yet often overlooked reason your budget doesn’t work is that you neglect paying yourself first. This means dedicating a portion of your income to savings or investments before you use it to pay for necessities or wants. The rule of thumb is for you to save 10-20 per cent of your income each time you receive it. Even before paying your rent and your groceries, you would pay yourself first by designating at least 10 per cent of your salary for savings. Automated savings or direct paycheque deductions can make this process easy because they automate the process and take the decision out of your hand, ensuring that your savings, retirement and investments are prioritised. An effective way to implement this is by directing these funds into a separate account, preferably one that is distinct from your everyday spending account and is not easily accessible. Without committing to paying yourself first, it is easy to spend first and save what’s left, which is often nothing. Paying yourself first, therefore, removes the temptation to forgo savings and investments. This method of paying yourself first can be used to meet savings goals such as building an emergency fund or saving for retirement. Those are priority once your debt is paid down. If you steadfastly resist unplanned withdrawals paying yourself first can pay dividends by allowing your savings to grow enabling you to achieve long-term goals.

Bottom Line

Budgeting is more than just a financial tool; it is a lifestyle adjustment that requires continuous effort and must be tailored to you and your needs. By creating a realistic budget, updating it regularly, diligently tracking expenses, and paying yourself first, you can overcome common budgeting challenges. If you are struggling to achieve your financial goals, consider consulting an NCB wealth advisor who can offer personalised guidance and investment solutions tailored to your unique situation.