Psychology of Budgeting

Creating and sticking to a budget is as much about our personal psychology as it is about money. Most of us understand that a budget is about balancing the money you have coming in with the money going out. It’s a simple concept. Why then, do so many of us have such a hard time with spending within our means?

The answer is rooted in a variety of factors that can stem from how we watched our parents spend, to how we are influenced by modern advertising or even a subconscious mechanism for dealing with stress. The causes are as varied as our life experiences. Creating a budget forces us to take a hard look at ourselves and what we are prioritizing in our life. This can be a difficult realization that may lead to avoidance and continued spending, ultimately replaying a cycle that can only be broken by finally understanding that spending habits can and need to be changed. The hope is that this moment of clarity can happen before you have gone too far down the path of spending yourself into a hole.

So how do we pivot toward creating a budget and taking a more mindful approach to our spending habits? The first and most important step is to start from a place of being kind to yourself. Feeling guilt about how you could have, or should have, spent money is an emotionally taxing and unproductive use of your time and energy. Reviewing your past spending to understand what is important and what is not, is a necessary part of the process. Beating yourself up over it is not.

This is about moving forward and creating a mindset of abundance, not scarcity. When you create your budget your focus should not be on the things you don’t have. Rather, it should be an acknowledgment and appreciation of what you do have in your life. It should incorporate a goal-setting process to motivate you to only spend on the things that really matter now while working hard to afford the things and experiences you would like in the future.

Start by first taking a look at your last 3 months of spending. Break it down into the following categories:

Needs- The bills you need to pay in order to live and prosper

Wants- The things that you don’t need but offer you enjoyment in life

Savings- The amount your willing to put away to move you toward your life goals

Once you have evaluated your recent cash flows, create your budget by matching these category buckets with your income. Here’s where you need to evaluate what is most important in life for both you and your family. Find a balance that works for you. You won’t be perfect in executing on your budget. Very few people are. But if you can use it as your guidepost, revisit it often, and make adjustments as needed, you will find the peace of mind that comes from taking control of your own financial wellness.