How can automated budgeting help?

We are wired to want “more” of everything and to live as comfortable a life as we can. This is not the case for each individual, but is certainly the general rule across most people. When it comes to budgeting, the best example of this trait is when we receive a pay rise, how much of that increase is saved? Think about your most recent pay rise and ask yourself if you saved any of it. If you did, well done, you are in the minority of people!

Behavioural finance is a modern phenomenon in the finance industry and at its most basic level, it refers to the psychological influences on our decisions about money. Why are we influenced to use our money in certain ways? What triggered us to make a call to spend money one way, when we probably should have spent it another? Was is greed, fear, guilt, a splurge?

This plays a huge role in the core aspect of a decent financial plan, which is to start with a sound budgeting strategy. Behavioural finance dictates that we make emotionally-charged decisions that are prohibitive to long-term financial success. When you read in the newspaper or see on the 6pm news bulletin that inflation is ~9% in the U.S. and the share markets around the world are experience 10%+ sell offs, the emotional reaction to that is to either sell, or not buy. Whereas, the complete opposite behaviour may have been more prudent.

The same effect happens when we budget manually. You get paid into an account, and then you have 100% control over where your money goes from here. A person who manually calculates how much money they would need for each expense or savings goal, is less likely to actually allocate the desired amount of money needed compared to someone who automatically budgets. It is easy to get distracted with an emotionally-charged decision to go and buy that item you have wanted for a while, but certainly don’t need, or go out for that expensive dinner for the second time that week.

An automated budgeting system works a lot differently, and does not rely on the human element. With this strategy, you get paid into an account, and then have automatic direct debits set up that allocate a specified amount of cash into as many sub-accounts as you need. Commonly, a sub-account per goal (car, holiday, new bed, presents, school fees, etc) is used as it enables the accounts to be completely separate and not blend into each other. Having the direct debits set up to occur the day after you are paid, reduces the time you have to make those irrational spending decisions that you might regret straight away.

Further, if you are one of many Australian’s with a mortgage, there are plenty of lenders out there that offer multiple offset accounts which are perfect for automated budgeting. You can view it all very simply on your phone with full transparency.

Budgeting should not be a dirty word and it is something that each household should embrace as it is normally the first real step on the road to financial freedom. The key is automation and simplicity; if you cannot write down yours and your families budgeting strategy on one page, it is too complex and should be revised. Why not take the time to review your budget and see how much of your next pay rise you will be able to save?