by Simon Wright

Created on: October 27, 2011

A budget is simply a process whereby an individual or household determines how much money they are going to spend during a given time period, and then reviews their performance against their set targets on an ongoing basis. The process of creating a budget starts with a review of recent spending, so that the subsequent budget targets are based upon a full understanding of costs and income. It’s important to provide this definition of budgeting as the reasons why budgets sometimes fail is often directly connected to a failure related to one or more of its component parts.

Failure to set realistic targets:

Sound budgets are always based on an honest evaluation of current income and spending patterns. Reviewing spending, however, requires a person to go through their bank statements line by line and allocate costs to spend categories and this isn’t the most exciting task in the world. Consequently, some people choose to ignore this step, or do it half-heartedly. The result is often that they set themselves targets that are simply unrealistic. Consistently failing to meet set targets is demoralising and may quickly prompt the individual to lose faith and abandon their budget.

Failure to set measurable targets:

Some people who have decided to try budgeting simply don’t set any targets at all. They simply have a wishy-washy thought that they are going to reduce costs. That’s an approach that is doomed to failure. Targets are essential to direct and drive behaviour and to enable us to measure how well we are doing with our objectives. However, another common fault is setting targets that can’t easily be measured. “I’m going to reduce my monthly spending on groceries to $500” is much easier to monitor (and more effective) than “I’m going to reduce spending on groceries”. 

Failure to monitor performance against targets:

The other area where targets are regularly used is in the work environment. If your company has set itself a target of spending “$1m dollars to attract 100,000 customers this year” then you can be pretty sure that the department manager will arrange for regular meetings to review how they company is doing against both its spending and customer acquisition targets. Similarly, with household budgeting, it’s important to regularly check how you are performing against the targets that you set yourself. This not only allows you to see how you are doing but also enables

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