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The Psychology of Budgeting

Budgeting works. It allows us to save money, get out of debt, and reach important life goals. When it doesn’t work, it’s usually because we have the wrong attitude about it, much like what happens when people try to start eating healthier or working out: if they don’t have the right motivation, the right attitude, and clear goals, they are bound to fail.

Budgets and diets for most people are structured and based on what they can’t do, how they can’t eat or buy what they want. Words like deprivation, agony, suffering, and “can’t” naturally come to mind and tend to frame how we think about money, in the case of budgeting. To overcome this, you’ll need commitment, determination, motivation, and a new attitude.

So, let’s change how we think—the very psychology—of budgeting. Instead of a severe, restrictive budget, we’ll turn it into a purposeful, targeted spending plan.

First, you’ll need a goal, a motivation, a reason why you’re regularly choosing not to eat out, or only see one movie a month in theaters. It could be paying off a loan, saving for a better car, saving for a wedding or a much-need vacation. With your goal in mind, you can start re-thinking your spending habits.

Instead of feeling deprived and helpless when faced with an expense outside of your planned budget, you can feel in control of the decision by thinking of it as an exchange: you are choosing to save money for your goal instead of spending it on a smaller, immediate gratification. Train your mind to think in terms of what you are choosing, instead of what you can’t afford/can’t buy. That new outfit you didn’t buy? That’s a month closer to paying off a student loan. The time you decided to make dinner instead of eat out? That’s a souvenir or an experience you can now afford on your up-coming vacation.

This re-thinking of how you spend your money is all about reward value. You’re attaching a value, a feeling of accomplishment and reward, to making spending decisions within your budget. Because as soon as you say you can’t buy another pair of summer shoes, that’s all you can think about. Your brain increases the reward value of the forbidden thing, making it harder to resist. But if instead of thinking about what you can’t have, you think about what you want (a nice vacation), the decision is easier to make, and you’re more likely to stick to your budget and your goals in the long-run.

Spending Plan Tips

  • Keep your goals front and center. Name them, rank them, figure out how long it will take to achieve them, and make visual reminders: make a Pinterest board, put photos on your fridge, do a countdown on a calendar, make a plan for how you’ll spend the money once you’ve saved it.
  • Your goals are things that you enjoy and value. So thinking about them should be enjoyable! When you decide not to spend money on one thing so you can save for one of your valued goals, think about how you’re actively achieving that goal with each decision. Train your brain to dwell on the immediate incremental satisfaction of working to achieve the goal.
  • Break your financial goals into smaller targets—like paying off one of your student loans or credit cards, or saving your first $100 toward a house—then celebrate those achievements to stay motivated.

A spending plan focuses on supporting your goals and gives you a feeling of control instead of forcing your mind into a state of deprivation. It should be a plan you want to follow because it leads toward goals you’re excited about—goals that get closer and closer every time you decide to stick to your spending plan.