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If Frequent Missue of Budget Reinforces Ineffiencncy Why Do They Continue to Be Misued

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5 reasons budgets fail - and what to do about them

The conventional advice for reining in spending and prioritizing saving starts something like this: Create a budget.

"Having an external tool to constrain your spending can be valuable," notes Emily Oster, associate professor of economics at the University of Chicago Booth School of Business. "But the added restriction can cause you to make mistakes."

The problem: A typical budget's list of checks and balances on a spreadsheet fails to account for, well, real life. Expenses change, prices fluctuate, impulse purchases beckon and the budget goes off the rails. Some studies have even shown that creating a budget might increase spending.

Ditching the budget and spending with abandon isn't the answer. In fact, the kind of fiscal restraint that budgeting is supposed to inspire has been linked with smarter spending decisions and increased happiness.

Instead of skipping out on creating a spending plan, focus on understanding the five biggest reasons budgets backfire and have a plan in place to overcome the pitfalls.

1. Budgets are inflexible
You create a budget to limit spending, right? What if the price of groceries goes up and the price of gas goes down? Is it OK to use the leftover funds from the gas column to cover the increased cost of food?

Oster believes this scenario is all-too-common in the envelope system of budgeting, which allocates specific amounts of cash in each budget category into separate envelopes to cover monthly costs.

"Instead of spending a little more on groceries and a little less on going to the movies, the envelope system only lets you use money within a specific category," she explains. "It's too rigid."

To make it work: Be flexible.

"Prioritize your expenses and rethink the system every few months, making adjustments as needed," Oster suggests.

2. Budgets put a focus on price
Need a new laptop? Decide on a budget before going to the store and you're likely to spend more than you planned, according to a 2012 study published in the Journal of Marketing Research.

Researchers discovered that shoppers who set a budget for an individual item were more apt to choose an item at the top of their budget instead of a lower-priced item with the same features.

"Setting a budget puts the focus only on the price of an item," explains Jeff Larson, assistant professor of marketing at Brigham Young University and co-author of the study.

To reverse the effect: Focus on features over price: Instead of setting a budget, decide on the optimal screen size, hard drive speed and RAM before shopping for a laptop.

"Comparing items with similar features and making a final decision based on price helps curb spending," notes Larson.

3. Tracking spending is exhausting
Tracking your spending takes discipline. You might start the month with the willpower to succeed but constant vigilance to avoid blowing the budget leads to mental exhaustion.

Research published in the Journal of Consumer Psychology notes that the more energy it takes to stick with a budget, the more likely you are to succumb to a spending spree.

The researchers note, "The capacity for self-control and intelligent decision making involves a common, limited resource that uses the body's basic energy supply. When this resource is depleted, self-control fails and decision making is impaired."

To get it right: Practice makes perfect. That old adage applies to budgeting. You're more apt to exercise self-control and avoid unplanned purchases if you continue committing to your spending plan.

4. Budgets require a best guess
While expenses such as rent, car loans and health insurance premiums remain stable month-to-month, some costs fluctuate -- and most consumers struggle to estimate their spending.

Shoppers who tried to calculate the exact price of the items in their baskets at the supermarket were more apt to overspend on groceries, according to 2010 research published in the Journal of Marketing.

"The shoppers who tried the hardest to track their expenses ended up losing track, getting frustrated and giving up," explains Koert van Ittersum PhD, study co-author and assistant professor of marketing at Georgia Institute of Technology.

To cut down on the guesswork: Take a long view. Average out those fluctuating costs over a longer period of time, and pad the average a bit on the high side.

When it comes to estimating the total cost of the items in the shopping cart or the number of kilowatt hours the electric company will bill you for this month, most consumers struggle to make an accurate guess. To accommodate for price fluctuations and variable expenses, van Ittersum suggests padding the budget to avoid financial distress.

5. Budgets don't incorporate surprise expenses
Your budget might include a column for emergency expenses alongside recurring payments like the mortgage and utilities but your monthly estimates are likely not very accurate.

In a study published in the Journal of Consumer Research, participants were off target as much as 40 percent with a monthly budget compared with 3 percent for a yearly budget.

"People feel quite confident about what their expenses are for a given month and don't think about unexpected expenses, which they do factor in if they're budgeting for a longer period," says Vicki Morwitz, professor of business leadership and marketing at New York University Stern School of Business and co-author of the study.

To soften the blow: Look with a long lens. Set aside money for an "undefined" emergency expense. Since it's impossible to predict the cost of car repairs or factor in one-time expenses such as wedding gifts into a monthly budget, there is more room for error.

"Take a long-term approach, plan for the unexpected and build emergency funds into your budget," advises Morwitz.

See related: Your first budget, in 3 easy steps

  • How to ask for a credit limit increase

  • 5 reasons budgets fail - and what to do about them

  • 6 crucial credit questions you should know answers to

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Source: https://finance.yahoo.com/news/5-reasons-budgets-fail-them-050000652.html

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