A Financial Planner Says This Unexpected Money Move Is Too Extreme

There are several ways to get your finances in order, whether it is hustling for new income streams, investing, or better debt management. But having a budget is fundamental, no matter what stage of life you're in. In fact, budgeting is also the most important skill for people entering the workforce later in life. Nonetheless, it is easy to get a little too excited while creating a brand new personal budget, especially if it's part of a New Year's resolution as well. After all, budgeting can be a chance to create a new, better version of you that can successfully tackle financial constraints and reach financial goals. Although cutting down on expenses is crucial, it turns out that completely changing your spending behavior in a short time is not just "not fun", but also not recommended by experts. 

Financial expert, Valerie Rivera, while talking to Business Insider, points out that abruptly planning on huge cuts without truly understanding your spending behavior is unsustainable in the long run and can end up backfiring. Have you ever tried a new budget, which had zero room for spending on fun activities, and ended up spending more than ever in the same month? Creating a budget can be a lot like setting up a new diet. With fat loss in sight, you may feel like cutting down on all calories only to end up feeling deprived and going on a regretful binge eating spree. If the constraints on your expenses do not make you feel content with life, you would probably not be able to sustain the habit for too long. "Then you think you're bad with money, and you revert back to where you were in the first place," Rivera tells Business Insider.

One of the major reasons dramatic cutdowns on expenses fail more than they succeed is because of how unrealistic they are. The 50/30/20 budget rule is already unrealistic for most Americans, so dead-dropping the "wants" section (30%) all the way down to zero is a recipe for failure. Out of all the people that decide to create a budget, less than 25% are able to stick to it anyway, per Discover. But the more interesting fact is that, according to a 2024 survey by Clever Real Estate, out of the people who do set a budget, as many as 39% end up exceeding their monthly spending targets. Having unrealistic targets can be a massive factor in such cases of "relapsing" into old habits.

If having an ice cream every other day is the best feeling in the world for you, or if you have been spending hundreds on dinners, setting up a $50 budget next month on eating out is going to be difficult to implement. Next thing you know, you have already spent double the budget in the first week alone and end up feeling demotivated. Apart from ignoring fun expenses, having unrealistic spending targets and time frames in other areas of your expenses, such as groceries or social outings, can often end up backfiring as well. 

In fact, for predictable expenses, what you should do is the opposite of underbudgeting –- have some extra dollars in your budget. If you spend around $125 to commute to work on average, be liberal with your budgeting and allot $150 to that category each month. This will make sure your targets are realistic and you also have extra cushion you can rely on, in case things overflow.

Instead of relying completely on guesswork while cutting on your expenses, it is good to have some idea about your current spending behavior. It is easy to succumb to the urge of setting lofty, unrealistic targets when you don't even know how much of your money is being spent on a particular expense. Take up to a month to track your expenses first. Once you have the hard numbers in front of you, you can decide which columns deserve a cut.

Moreover, the way you tackle cutting expenses can also influence whether you sustain your new budget or not. It is always better to gradually reduce expenses. Rivera also recommends that instead of abruptly banning all fun expenses from your life, you should introduce friction points between yourself and impulse purchases. If you can't resist reaching out for your credit card every time you see "sale" at your favorite apparel brand, remove your credit card info from your phone. The time you spend finding and entering your credit card details can be enough to reconsider your purchase. 

Furthermore, although you're trying to cut down, you should still leave some wiggle room for unexpected expenses that can otherwise leave you frustrated. Having a fund for emergencies is crucial, but there are other ways you can find yourself spending more than you planned for as well. For instance, you would probably not want to say no to an impromptu social outing just because your budget does not allow you this privilege. Keep some flex money in reserve so you can attend the event without feeling like you failed to achieve your budgeting goals.