It is early January and you are sitting at your laptop with a hot coffee. You draw up a tight budget: so much for groceries, so much for going out, the rest to your savings account. It looks good. By mid-February the spreadsheet is forgotten. A birthday, a car repair and a few busy weeks in which you ended up getting takeaway after all, and the plan was beyond saving.
Many people then decide that they are “just no good with money”. That is rarely the real reason. Usually the problem is not you, but the way the budget is built: it relies on daily willpower, and that is not something you can build on. Fortunately, you can also set up a budget so that it does a large part of the work itself.
A plan on paper is not yet a plan in real life
As early as 1979, Daniel Kahneman and Amos Tversky described the “planning fallacy”: we are consistently too optimistic about how much time, money and effort something will take. We plan as if everything will go as intended, and forget the things that come up every year. In a budget, you see this in the items that do not recur monthly: home insurance, property tax, car maintenance, school bills in September, presents in December.
A budget that does not account for these feels manageable in the first few weeks. But every time one of these costs turns up, it seems as if you have failed, when the plan was simply incomplete.
Why willpower falls short with money
Every purchase is a small decision, and you make dozens of them every day. Kahneman (Thinking, Fast and Slow, 2011) distinguishes between fast, intuitive thinking and slow, deliberate thinking. Deliberate thinking is thorough but tiring, and we would rather not use it all day long. A budget that requires a conscious trade-off with every purchase places a heavy load on that slow system.
What is more, that load grows heavier as money gets tighter. Sendhil Mullainathan and Eldar Shafir (Scarcity, 2013) showed in their research that money worries take up mental bandwidth. People who are short of money therefore have to think about spending most often, with the least room in their heads to do so. That is not a character flaw; it is a consequence of the situation.
And then there is all-or-nothing thinking. The diet researchers Janet Polivy and Peter Herman described what is sometimes called the “what-the-hell effect”: anyone who strays from their plan once often abandons it completely afterwards. You see the same thing with budgets. One weekend of overspending, and the rest of the month no longer matters.
Let your budget do the work
The good news comes from behavioural economics. Richard Thaler and Cass Sunstein (Nudge, 2008) show that the default setting, what happens if you do nothing, has an enormous influence on our behaviour. Brigitte Madrian and Dennis Shea (2001) found that far more employees took part in a pension savings plan when they were enrolled automatically and could opt out than when they had to sign up themselves. And with the “Save More Tomorrow” programme (Thaler & Benartzi, 2004), people saved noticeably more because they decided in advance to set aside part of their future pay rises.
The lesson: decide once, at a calm moment, and let the system do the rest. Thaler also described “mental accounting”: we treat money differently depending on the pot it sits in. You can use that to your advantage. Money held in a separate account for insurance feels less like money you are free to spend.
Add up all the costs that come round once or a few times a year: insurance, property tax, road tax, maintenance, subscriptions that renew annually, school costs. Divide the total by twelve and set that amount aside automatically each month in a separate account. That way a large bill becomes a planned expense instead of a shock.
An example: Thomas and Sara
Thomas (38) and Sara (36) have two children and both work full-time. They had already tried three times to keep a budget in a spreadsheet. Each time it foundered on the same thing: every expense had to be entered, they argued about who had forgotten, and after an expensive month they gave up.
The fourth time, they chose a system instead of discipline. The day after their salaries are paid in, three standing orders leave their joint account: a fixed amount to a savings account for unexpected costs, an amount to an account for annual costs, and a fixed weekly budget for groceries and leisure to a separate account with its own card. Whatever is in there, they can spend without guilt. When it runs out, they wait until Monday.
They no longer track every expense. Once a month they spend ten minutes together checking whether the amounts are still right. When the home insurance bill arrived in November, the money was ready. “It’s the first time a letter like that didn’t lead to an argument,” says Sara.
A budget you can stick to, in five steps
- Map out your fixed costs and annual costs. Go through your bank statements for the past twelve months so you do not forget the irregular costs.
- Pay yourself first. Have a savings amount go out automatically the day after payday, not at the end of the month with whatever is left over.
- Work with pots. Separate accounts or the savings pots in your banking app make it visible what each sum is for.
- Give yourself a free amount. A budget with no room for enjoyment invites all-or-nothing thinking. A fixed free amount makes it liveable.
- Plan a short monthly check-in. No daily checking, but a fixed moment to adjust course. If a month turns out differently, you adjust the plan instead of giving it up.
The Budget planner helps you map out your income, expenses and buffer in one place, as a starting point for your own pots.
From daily struggle to peace of mind
A budget is not a test of your character. It is a tool for directing your money towards what matters to you, with as little daily struggle as possible. The fewer decisions it asks of you, the more likely you are to stick to it, and the more peace of mind it gives you. That is financial self-care: not being harder on yourself, but making your system kinder to the person you are, even on a difficult day.
Would you like to build this thoroughly, with assignments you apply straight away to your own situation? In the online training You can learn to budget, you learn in eight modules how to draw up a household budget you can actually keep to.