Why Traditional Budgeting Fails High Earners (And What to do Instead)
THE QUICK & DIRTY
Tired of your budget failing by mid-month? You're not alone. Traditional budgeting sets us up for failure by relying on willpower to overcome our natural tendencies. The Reverse Budget flips the script, automating savings and allowing for guilt-free spending with what's left. Learn how to achieve your financial goals without constant restriction.
KEY TAKEAWAYS
Traditional budgeting often fails because it relies on restriction and willpower, which are undermined by our natural psychological tendencies.
The Reverse Budget prioritizes saving and investing upfront, allowing for guilt-free spending with the remaining funds and aligning with our desire for immediate gratification.
By automating savings and focusing on specific financial goals, the Reverse Budget empowers individuals to achieve financial freedom without constant deprivation.
Budgeting makes perfect sense–in theory–but rarely works for most of us, especially high earners. By the end of the month, your checking account is usually as empty as a politician’s promise.
It’s not for lack of discipline. You wouldn’t have gotten as far as you have in your career if you weren’t on top of your sh*t. The problem lies in the very foundation of how we were taught (if we were that lucky) to manage money. The concept of budgeting ignores obvious observations that Duke Professor, Dan Ariely, makes in his NYT bestseller, Predictably Irrational.
This "licensing" effect, as Ariely calls it, translates directly to budgeting. We might diligently track expenses for a week or two, feeling proud of our financial restraint. But then, that feeling of virtue can lead to a "reward" purchase, a little splurge that throws the whole budget off track.
Or, we might overestimate our ability to resist temptation in the future, leading to overly optimistic budgets that are doomed to fail. We tell ourselves we'll cut back on dining out "next month," but when the time comes, our present bias takes over, and we prioritize immediate satisfaction over long-term savings.
We are taught to rely on mechanisms that are undermined by our own psychology. Here’s the truth about budgeting, it’s designed to fail.
The Budget Lie You’ve Been Told
What’s your end goal with budgeting? Budgeting isn’t fun (if you disagree, this blog is not for you), so why are you doing it? You’ve been told that budgeting is the responsible way to manage your money so that you can save, invest, pay down debt and eventually build wealth, achieve financial freedom, and retire.
But approaching your big savings goals with small spending cutbacks is the wrong approach. It's like trying to fill a bathtub with a dripping faucet while the drain is wide open. You might make some progress, but you'll constantly feel like you're fighting a losing battle.
The Psychology of Restriction
This feeling of constantly fighting against yourself is at the heart of why traditional budgets fail. It creates a psychology of restriction, a mindset of scarcity and deprivation that sabotages your efforts from the inside out. Let's explore the key reasons why this happens.
Scarcity Mindset
Traditional budgets often emphasize what you can't have, creating a feeling of deprivation and scarcity. This leads to feelings of stress, resentment, and even rebellion against the budget itself. Our brains are wired to react strongly to perceived scarcity, triggering a fear response that can make it harder to make rational financial decisions in the moment.
Loss Aversion
People tend to feel the pain of a loss more strongly than the pleasure of an equivalent gain. This is especially true when we've become accustomed to a certain lifestyle—a phenomenon known as "lifestyle creep"—making it even harder to give things up. Budgeting can feel like a constant series of small losses (giving up things you want), making it emotionally draining.
Lack of Agency and Control
Strict budgets can make people feel like they have no control over their money. This can be demotivating and lead to giving up on the budget altogether. People thrive when they feel empowered to make choices. Traditional budgets can feel restrictive and dictatorial.
Shame and Guilt
When people inevitably slip up (as we all do!), traditional budgets can trigger feelings of shame and guilt. This negative reinforcement can create a harmful association with budgeting and make it even harder to stick to a plan.
Cognitive Overload
Traditional budgets often involve detailed tracking and categorization of expenses. This can be mentally taxing, especially for those who aren't naturally inclined towards detailed financial management. The complexity can lead to procrastination and avoidance.
Present Bias
Humans tend to overvalue immediate rewards and undervalue future benefits. Saving and sticking to a budget requires delaying gratification, which can be challenging due to our inherent present bias.
The Better Way To Budget: Reverse Budget
Introducing my favorite way to budget. It can be automated, you set it up once and then you never have to think about it again–at least until something changes with your income or expenses. The Reverse Budget is flexible, and as we know, life is unpredictable, so flexibility is a great thing.
There’s only one rule to make the Reverse Budget work for you. Specificity. You MUST know what you’re saving for. You have to define your financial goals.
To learn exactly how to set up your own Reverse Budget, check out our article, How to Reverse Budget: The Set It and Forget It Strategy.
The Bottom Line
If it’s not obvious, I’ll state it plainly. I hate budgeting.
I don’t believe in it. It doesn’t work and, more importantly, it doesn’t help you achieve what you actually want – which is to enjoy your money, and not think twice when you buy stuff.
The biggest lie is that small spending cuts today will lead to big financial wins tomorrow. The Reverse Budget offers a simple, sustainable solution that aligns with your psychology and puts you in control of your finances so you can prioritize long-term savings and investments to build true wealth.
Stash Wealth offers financial planning services for 30-somethings who earn six figures.
Whether you’re saving up for Tahiti or a Tesla, we help you achieve your short-term and long-term financial goals.
Ready to make your money work harder for you?
Written by Priya Malani
Founder & CEO
Priya is an industry thought leader and personal finance expert for HENRYs [High Earners, Not Rich Yet]. Her relatable, no-bullshit style has garnered attention from the largest media outlets in the country including Forbes, The Wall Street Journal, Business Insider, NerdWallet, and more.
