Most budgets are abandoned within a few weeks. They get made in a spreadsheet on a quiet evening and lose touch with everyday life, where all the money sits in one pile and every purchase is a new decision.
What works better is splitting your money into pots. In a field study in India, construction workers received their savings in envelopes. Those who got it split into two envelopes saved more than those who got it in one, and those with a picture of their children on the envelopes saved the most. Money with a visible purpose is harder to touch.
Pick the approach that suits you:
- 50/30/20 if you want a simple framework to start with.
- Separate accounts if you want to see the pots.
- A weekly amount if you don't want to do any math at all.
- Give every dollar a job if you want to go further.
A first step today: write down your paycheck and your fixed expenses. What's left is what you actually have to divide up.
Making a budget means deciding in advance where your money will go, instead of looking back afterward to see where it went. Most budgets are still abandoned within a few weeks, because they're made in a spreadsheet and then live apart from everyday life. A budget that lasts splits your money into pots, each with its own purpose, so a purchase doesn't require a fresh decision every time. This article covers what a field study says about why pots work, four ways to make a budget, and how to adjust it. For where a budget fits into the rest of your finances, see personal finance in the right order.
Why budgets get abandoned
A budget is almost always made on a quiet evening, with numbers that look reasonable. Then the money carries on in the same account as before. Grocery money, fun money, and savings all sit in the same pile, and every purchase becomes a negotiation with yourself: can I afford this? The answer is usually yes, right up until there's nothing left.
The second reason is that the budget gets too detailed. Twenty categories are impossible to keep track of in daily life. After a month, none of them add up, and the whole budget feels like a failure.
Money in separate pots is harder to touch
In 2011, Soman and Cheema ran a field study with 146 construction workers in rural India. They were paid weekly in cash, had no bank account, and lived, as they described it themselves, one week at a time. Over 14 weeks, part of their pay was set aside as savings in sealed envelopes. Some got their savings in one envelope, others split into two. For about half of them, the envelopes carried a picture of their children.
Those who got the money in two envelopes saved more than those who got it in one, and the picture of their children increased savings even further. The effect of splitting the money was largest when the picture was there. The researchers' explanation is that breaking a division feels more wrong, and even more so when the money has a visible purpose.
The study involved a specific group in a cash economy, and it hasn't been tested the same way with bank accounts. But the principle can be used anywhere: money that has its own pot and its own purpose is harder to touch than money in a single pile.
Four ways to make a budget
No single approach suits everyone. Choose based on how much math you want to do.
50/30/20. For you if you want a simple framework to start with. Half of your take-home pay goes to necessities like housing, food, and bills, just under a third to the things you want, and a fifth to savings and debt. It's a rule of thumb, not research, and where rents are high the shares need adjusting. First step: work out how much of your income currently goes to necessities.
Separate accounts. For you if you want to see the pots. One account for bills, one for everyday spending, and one for savings, with an automatic transfer to each on the same day your paycheck arrives. Consider naming your savings account after what it's for. First step: open a second account and give it a name.
A weekly amount. For you if you don't want to do any math at all. Pay your fixed expenses and savings first, divide what's left by the number of weeks, and move one week's amount to a separate card every Monday. When it runs out, the week is over. First step: work out your weekly amount today.
Give every dollar a job. For you if you want to go further, and it's the most demanding approach. Every dollar that comes in gets a task before the month begins, including the ones meant for savings, until nothing is left unassigned. It takes a little time at the start of each month, and you'll need to move money between pots when something changes. First step: divide up your next paycheck on paper, all the way down to zero.
How to adjust your budget
Your first budget will never be right. Think of it as a guess that gets better every month. Go over it once a week for ten minutes: which pot ran out, which had money left over? Move money between pots rather than giving up on the whole budget.
Keep the number of pots low. Three to five is enough for most people. And always include a small pot for the unplanned, like gifts, a broken bike, or a dinner out, so it doesn't eat into everything else.
A first step today: write down your paycheck and your fixed expenses, and work out what's left to divide up.
If food is the pot that always runs out first, the next part of this series is about saving money on food.
This is the understanding and a first step. Atlas is where it becomes a habit. Add Money as its own area, and you'll find the Weekly review, which compares the week's purchases with your budget in four steps, and Today's purchases, both there as suggestions to make your own. Try Atlas free for 7 days, and cancel whenever you like.