What are the challenges in saving more by budgeting?
Understanding the challenges in budgeting is the key to successfully budgeting and saving more.
For budgeting to be successful and truly able to save you more, challenges in budgeting need to be overcome.
This is part 2 of a 3 part blog, where we look at the various challenges in successfully budgeting to save more from your income. In order to understand the challenges, it is important to understand the process of budgeting, which is covered in part 1.
Let’s look in detail at each of the challenges in saving more by budgeting.
Challenge 1 — Setting your savings or spending goals.
Understanding your savings or spending goal for the ‘Goal setting’ is one of the biggest challenges in making budgeting work. There are two ways to look at this problem.
i) How much do you want to save? After setting aside money for the absolutely essential expenses (rent, bills, etc.) from your income, earmark a certain amount to save and spend the rest. If you are saving money for something specific such as a deposit for a home purchase or a holiday, then you know what you want to save.
However, if you are saving for the rainy days i.e., for the unknown and unexpected such as loss of income (considering the turbulent times we are in), it is just not possible to know what specific amount to save each month.
Simply setting a spending target based on how you spent in the past months may not be the best approach if you want to increase your saving or even to save in the first place
It ends up being an arbitrary specific amount that is targeted to be saved each month. Ideally, you would like to save more than you currently do because you do not know how much you will need in the future.
ii) How much do you want to spend? How do you know what spending target to set for the various spending categories such as takeaway meals, shopping, entertainment, etc?
Simply setting a spending target based on how you spent in the past months may not be the best approach if you want to increase your saving or even to save in the first place if you have not managed to save previously.
Doing what you did in the past is likely to yield the same result you got in the past.
Challenge 2 — Monitoring your spending behaviour.
Monitoring your spending behaviour to keep it within limits is a big challenge. It is one thing to have a spending limit of, say, £75 for drinking for the month. And it’s quite another thing to keep that spending limit in mind while out drinking with mates. The same goes for impulse shopping or ordering takeaways when you feel too lazy to cook.
How do you time your spending so that you don’t end up spending too fast?
Another problem is that budgeting for spending items that are discretionary and irregular in nature for an extended time horizon, such as monthly, is bound to be tricky. How do you time your spending so that you don’t end up spending too fast?
If you end up spending too fast, then it can result in either overspending for the month, dipping into your savings, or taking up debt. The end result is that you will be saving less than you wanted to.
Challenge 3 — Usefulness and timeliness of your spending data.
Closely tied to monitoring your spending, as discussed in the above point, is the usefulness and timeliness of your spending recordkeeping as a part of the budgeting process. You cannot make correct spending decisions if you don’t have useful and timely data about your spending that is easy to understand.
Manual recordkeeping of one’s transactions requires a significant amount of discipline and proactiveness to have an accurate view of your finances at all times.
Relying directly on your bank statements for your transactions data may result in issues around the usefulness of the data. Looking at transactions from your statement, you may not always be able to tell what you spent on, especially if you don’t recognise the merchant’s name as presented in the bank statement. As a result, you may not have an accurate view of how much you have been spending on various spending categories.
This poses significant challenges for spending while following a budget and can derail one’s savings plans.
Some budgeting apps are doing a better job of addressing this issue. Having analysed all the major budgeting apps in the market today, I find that categorising a transaction accurately is still a work in progress, however, it is moving in the right direction.
Challenge 4 — Reviewing your budgeting and spending, and adapting
Reviewing your budgeting and your spending behaviour is perhaps the biggest challenge. It is a necessary step towards making your budget a success story for saving more. There are 2 main challenges in the reviewing and adapting process.
Reviewing your budgeting and your spending behaviour is perhaps the biggest challenge
i) How often should you review? There is a lot of literature on the internet that suggests a review period from once every week to once every year.
Reviewing once a year is the easiest but it also means you put up with what may not be working for a year. This also means potentially missing opportunities to increase your saving. On the other hand, reviewing frequently certainly has benefits but may be very demanding in terms of time and effort.
ii) How do you decide what changes to make after the review process? This is a step that requires more involvement. How do you decide whether to make changes to spending/savings goals, if they were unrealistic to start with, or to cut down on your spending, or a bit of both?
The default approach may be to stick to an arbitrary target or go by your spending history. Sticking to an arbitrary target might not be optimal or you may continue to struggle with meeting your goals. If you go by your spending history, you are essentially repeating what you have been doing and it may not lead to saving more money if it has not worked in the past.
How to overcome the challenges?
Challenges in the budgeting process that impacts the goal of saving more can be overcome by a combination of the things listed below:
1. Regular feedback on your spending that is timely and useful i.e., easy to understand
2. Trial and error approach to understanding what works for you in terms of goal setting
3. Understand the patterns in your spending behaviour
4. Make your financial data easier to understand
5. Automate manual processes thus reducing the time and effort required
6. Organise the budgeting process such that there are fewer decisions to make, thus making the experience easy and fruitful
In the final part of this 3 part blog, I will explain in detail how the above-mentioned points can help you get the best out of budgeting and help you save more.
Do comment below if you have faced any more challenges in your budgeting process.
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