Research shows that having a budget and sticking to a budget are two very different things. Most consumers create budgets, but the overwhelming majority fail to stick to them. One reason for this issue is because many people don't know which payment type is best if you're trying to stick to a budget.
Overspending is a challenge a lot of people have to overcome. And while it seems like a tall order to accomplish, learning the main reasons why you have trouble sticking to a budget is the first step to keeping more money in your bank.
Why is it difficult for consumers to stick to a budget?
According to research, even though most people say they have a budget, 79% of them fail to follow it. Many consumers spend about $143 more per week than their budget dictates, which can add up pretty quickly over the course of a year.
But why does this happen? Why are people so quick to spend more than they actually have? One reason is simple: smart marketing. People are inundated with messages on the internet and on social media that tell them having X, Y, and Z is going to make them happier.
However, another primary — and more pressing — reason that people struggle to stay within the confines of their budget is the pressure to keep up with their peers. For example, people may have friends who have certain products, so they end up thinking they need the same products to keep up with their friends.
But this kind of social pressure isn't limited to one's circle of friends. Social media also plays a role in tempting its users to spend money. The sheer number of influencers on social media — who are all promoting clothes, shoes, cosmetics, food, personal care products, travel experiences, jewelry, and more — is enough to lure even the strictest budgeter. In fact, 57% of millennials reported making unplanned purchases based on something they saw on social media. Unfortunately, this constant unplanned spending can add up, creating financial distress for consumers, especially if they are spending money they don't actually have.
Payment methods that make it hard to follow a budget
While social media and marketing can entice you to go over budget when you’re comfortable with the funds in your bank account, those aren't the only two forces working against you. There are two specific payment types that are not the best solutions to use if you’re trying to stick to a budget.
1. Credit cards
Swiping a credit card does not feel the same as shopping with cash. When you hand physical money over to a cashier, you can see your money being taken away from you. This awareness helps you spend less money because it feels like your wallet is getting lighter.
With a credit card, however, this is not the case. The money is abstract. Swiping a card does not create that same sense of "loss," because physical money is not changing hands. In this case, you won't feel like you're spending that much money, which may tempt you to spend even more.
2. Installment loans and rent-to-own
Rent-to-own refers to a situation where a potential buyer has the option to purchase the asset (e.g., a house) at some point in the future. Traditional home purchases, by contrast, happen almost immediately. The ownership of the asset is transferred to the buyer, who then begins to pay off their asset.
On the other hand, installment loans refer to most personal and commercial loans. Installment loans are simply any loan with regularly scheduled installments, also known as repayments.
While heavily marketed, both of these financial instruments can cause problems with your budget. Financial institutions use rent-to-own and installment loans to take advantage of consumers who are less financially literate by using complex financial engineering to hide the real costs associated with the programs.
These financial institutions do this by using language like, "It's going to cost X dollars per week" instead of saying "X dollars per month." By breaking it down on a weekly basis, the cost sounds a lot cheaper, but it compounds much faster, leading to more expenditure over time.
Budget hack or budget bust?
Sticking to a budget might be easier if you implement a good budgeting strategy. The 50/30/20 rule, one of the most popular budget hacks, recommends that you split your income into three separate categories to decrease your debt and build financial wealth.
Suggested by Harvard economist and politician Elizabeth Warren and her daughter, Amelia Warren Tyagi, the creators propose that 50% of your income go to necessities like food, clothing, rent, transportation, and utilities. Thirty percent of your income should go to lifestyle choices like entertainment, vacations, and cell phone and cable bills, while 20% of your income should target your savings and retirement accounts.
It’s a practical budget that most people see success with, but does that mean it’s bullet-proof? Nope. Some people who carry student loan debt and don’t make a sufficient income believe that the 50/30/20 budget doesn’t work. Moreover, if you have a hard time discerning between wants and needs or struggle to track all of your expenses, you might also find that the 50/30/20 budget is impossible to follow.
Is there anything that you can implement to help you stick to a budget?
Why are virtual cards a solution?
Privacy's virtual cards are a huge benefit if you’re looking for a payment method that will help you stick to your budget. With Privacy, you have the ability to set spending limits. Once you reach that limit, you can't go over it unless you go into your account and increase the limit yourself.
Sometimes, the mere fact that you reached the limit is enough to deter you from overspending. It can make you think twice about whether you really need to increase the limit or if you can do without the items you were planning to purchase.
Privacy also prides itself on transparency in its cost structure. There are no hidden costs like maintenance fees, annual membership fees, or overdraft fees. Some consumers might not have any idea what fees are associated with their physical cards, but these fees can add up. With Privacy, there are no strings attached.
Sticking to a budget is difficult, but not impossible
While limiting the amount spent in a month can be tiresome, boring, and frustrating, the benefits far outweigh the effort involved. By creating and sticking to a budget, you can rest assured that all your money is strictly under your control and that you're not being influenced by friends, social media, or marketing ploys.