Written by: Sophie Hau, Executive Contributor
Executive Contributors at Brainz Magazine are handpicked and invited to contribute because of their knowledge and valuable insight within their area of expertise.
Have you ever caught yourself checking your bank balance and wondered where did your money go? Or have you ever faced the dilemma of whether you should invest in a product? Chances are that your budgeting system isn't efficient enough (if there is even one to start with).
Whether you are an overspender enjoying an Epicurean lifestyle or an under-spender saving every single penny, you aren't in control of your money. Money controls you.
Here are 5 reasons why everyone needs to develop a solid budgeting system to stop being the guessing spectator and enter the planning arena:
1: To assess your financial situation
Adopting an ostrich approach regarding your financial well-being is like playing a game without knowing the rules. How can you win if you don’t know how well or poorly you are doing? Avoiding reality is another word for being in denial. We all know this alcoholic friend who tells you they could stop anytime, but deep down, they know they can't. It's the same if you don't have a budget. You tell yourself you know where your money goes, but in reality, you have no idea how to retire or handle a job loss. The truth is the budget doesn't lie. They can prove that a purchase is not an isolated event but a spending tendency. Prior to his budgeting habit, Jules*, my client estimated his monthly social activities to be $600; once he started tracking his expenses, he discovered the actual budget was double when he averaged out the whole year's expenses, including gifts and travel costs related to those social events.
2: To be more intentional when spending
Let's face it. People cannot have it all. Even millionaires sacrifice one thing to buy another. Once you know how much you spend in which category, you can assess if this purchase aligns with your values. Let me pause here and share with you the three most common biases related to purchases:
Bandwagon effect – you buy because everyone else buys
Shiny toy syndrome – you constantly chase a new purchase because it gives you this temporary sensation of happiness from ownership
Diderot effect – once you upgrade an item, you upgrade everything else to match the first item
Awareness can help you tackle those biases, assess what truly matters to you and spend accordingly. My client Anne* drastically reduced her alcohol budget as soon as she discovered her value isn't binge drinking to cope with work stress; instead, it's spending quality time with her loved ones. She suggested new ways to bond with her friends, such as doing outdoor activities rather than spending lavishly in restaurants and bars on weekends.
3: To make better financial decisions
Now that you have reduced your spending on things you don't value, you can reallocate your extra money wisely to reach your financial goals.
"Goal setting and planning skills have a causal link to subjective well-being," according to a 2008 research study. So make them SMART (Specific, Measurable, Attainable, Relevant,and Timely)! What do you want to achieve?
Sponsor your kids' financial education
Explore a new country every year
Pay for your parents retirement home
Start your own business
Buy your first home
Retire by age 60
Redefining what you genuinely want also makes saving easier. This gives you the extra motivation to not comply with social pressure. Now, when you are faced with an investment question, you can reasonably decide, backed up with data and your goals, if this is worth taking risks. Back to Jules, he resented investing and planning for his future because he had bet on the stock market and Bitcoin on a whim, thinking he could withdraw the cash as soon as he earned enough without defining it. The market went up briefly before it crashed, where he made significant losses. Unfortunately, that was his first time and last time when he invested.
4: To be prepared for the future and the unknown
Budgeting enables intelligent analysis, where you can take appropriate actions accordingly. You are the type who either knows exactly what you want in 10, 20, or 50 years or is absolutely clueless about who you want to become tomorrow. But it doesn't matter.
We live in a world with a lot of uncertainties, so do you want to be prepared to face unforeseen events such as a job loss, a lethal virus, a critical illness, or just a mid-life crisis? Jules grew up in France, where money conversations were taboo at all levels of society, and back then, retirement schemes weren't questioned. But like most systems, there are flaws. With the growing aging population, today'saverage monthly pension is USD 1,528 monthly in France (note that women's is USD 1,146), which is insufficient considering the current global inflation plague. And the same phenomenon has also occurred in all of Europe.
5: To overcome the paralysis of fear and shame
Your inaction toward budgeting isn't because you are lazy or lack information; in fact, most people already know they should budget but don't (only 40% of American households use a budget). Financial education alone isn't enough to change unhealthy financial patterns when they are driven by fear or shame. Let me rewind: money beliefs and behaviours are adopted before age 10 when we unconsciously create automatic strategies to deal with money and life in general. Back to Anne's story, she had never done budgeting in the past because, according to her, she was terrible at Maths in school. In reality, people have no problem with addition or subtraction, which is all you need to make a budget. Her inaction toward money isn't a result of a lack of capabilities but a money belief carried since childhood when her loving father suddenly became angry and skeptical after losing his job. He constantly complained about their lack of money while her mother bought expensive clothing on these shopping sprees.
As a result,she grew up being very confused about finances and thought that money would change people and make her a person she despises.
Anne had to learn how to overcome her fears and twist her belief so that money wasn't good or bad. Instead, it's a resource used to achieve what she wants in life.
So, what now?
If you aren't budgeting consistently or effectively, you either don't know how to get started or have an underlying fear in your money beliefs. Don’t worry, you can start today by:
Educating yourself on how to make a solid budget – you can start here with a checklist on how to do it.
Untangling your personal money story to connect the dots between your past experiences and your relationship with money today.
If you already know you won’t get started, book an appointment here with HØDL by design Founder and CEO Sophie Hau to help you identify the underlying sources of dysfunctional money patterns and guide you in building the budgeting habit that works for you.
"Names have been changed to maintain confidentiality."
Sophie Hau, Executive Contributor Brainz Magazine
Sophie Hau is a Certified Money Coach (CMC)® who helps her clients transform their relationship with money to become financially healthy. With over 15 years of experience working in non-profit, corporate, and entrepreneurship spanning 3 continents, her diverse career has led her to create a company bridging personal finances, coaching, and psychology: HØDL by design. The platform aims at raising awareness about the psychological factors in individuals' relationship with money so that finances are no longer a barrier to achieving one's full potential. Her mission: making financial education accessible to all.
