Common budgeting misconceptions that are holding you back financially

We’re about to dive into a conversation about budgeting. Don’t worry, it’ll be fun. But before we do, allow me to introduce to an interesting phenomenon in psychology. The “Lake Wobegon effect”. This is a human tendency where people overestimate their own capabilities. This happens a lot with drivers (have you ever noticed how virtually every driver thinks that they’re a fantastic driver? And that everyone else on the road is an idiot?) 

It also happens when it comes to money, and is especially prevalent with budgets. So, now that you’re at least curious about whether you ACTUALLY have a good approach to budgeting or not, let’s dig in.

1. A budget is not tracking your spend - it’s a plan on how to use the money that you have

A few years ago, I was out with a couple of my friends. Everyone was having a few drinks and the place was starting to get a little rowdy. One of my friends had just received a bonus and he was on a money splashing spree (Which to be honest is the main reason I was there).

A few drinks later, things got a little heated between the guy and his girlfriend. I usually would mind my own business, but this seemed quite interesting, and I started listening (plus, to be fair, they were shouting so it was hard to not hear them). The girl was furious that the guy was spending too much of his money (he had bought us at least 3 bottles so this is was a fair point, I guess). The icing on the cake - she started shouting at him about how reckless he was with his spending and his life in general. We all leaned back to see how he’d react…(I’ll skip ahead to the key part) The guy slammed his glass down and very loudly, clearly hurt, shouted back “That’s the most insane thing you have ever said! I know exactly the amount I have spent here so far. I have a budget.”

Weeks later, I was curious and I decided to ask him for budgeting tips. To my surprise, it turned out he didn’t have an actual budget - apparently, he budgets by knowing exactly how much he has left, and compares that against all the money he has actually spent (if he’s left with something to save, he’s “on a budget”).

Which brings me to my first point. A budget is not tracking your spend; It’s a plan on how to use  money you currently have. If all you do is track your spending, you are only focused on the past - the money you have used, which goes against the definition of a budget. A budget is a plan on how to use the money that you have. It’s your game plan to build a better life.⠀So, go beyond tracking spend, to create an actual plan of the money that you currently have.

2. A budget is not restrictive - it’s simply you telling your money where to go, instead of wondering where it went.

Quick confession: I used to hate budgets. My logic: Why should I work so hard for my money just for someone/something to tell me how to spend it? 

What changed? I learned how we think about budgets at Africa’s Pocket, and I’ve brought that changed perspective into my own life.

This brings me to my second point, which is  “A budget is not “restrictive” - it’s simply you telling your money where to go, instead of wondering where it went.”  The first thing you need to realize when it comes to budgeting is that a budget/money plan should be a reflection of your lifestyle and the things that you value the most. If you value saving (which, we highly recommend!), budget for that. If you value going to the gym, budget for that. If you love traveling, please, budget for that. 

Your budget is your money plan. Let it be a reflection of the things that you value the most. And your way to eliminate those you don’t value.

3. A budget doesn’t have to be complicated - it just has to be useful

Some people go above and beyond when it comes to creating a budget. Like this guy…

Source: random image from Google

If you hate Excel, and looking at that image just made you feel tired, that’s OK - just don’t make a budget as detailed as his. And if it left you feeling inspired, that’s OK too - dive in and make one with all the bells and whistles you like!

For a budget to be useful, there are only 3 key things you need to know, and everything else is a bonus. Specifically: 

  1. Know how much you earn

  2. Know how much you intend to save (at Africa’s Pocket, we advocate for saving before you spend)

  3. Know your expected expenses/costs for the month/week (depending on how long your budget is supposed to cover). If you’re not sure about your expenses, start with rent, groceries/food, transport and entertainment.

You’re now ready to build your budget. This could be in a simple excel sheet, or in an app, or even on a piece of paper - whatever works best for you. 

Once you have your budget, check against it to make sure you stay on track - manually at the end of each day or automatically if you have systems in place to do so (this shouldn’t take more than 5 minutes of your time). 

So there you have it - “The Lake Wobegon effect” applies a little bit less to you now when it comes to budgeting. Congratulations!

Looking ahead, happy budgeting, and more importantly, enjoy building the life you want!

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