An Ambitious Budget May Be Better Than a Realistic One
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How many times have you read a caution about being realistic when setting a budget? The conventional wisdom is that you’ll never stick to a budget that’s too tight, so don’t overshoot.
A recent academic study throws that theory out the window. If you’re trying to cut back on your day-to-day expenses, you’re actually better off setting an ambitious target you may not meet, the study found.
The research — which relied on more than 350 million transactions from 70,000 users of a U.K. personal finance app — found that people who set an ambitious budget spent 21.9% less than when they didn’t budget at all. And the results held, even six months after the budgets were set.
“You actually don’t want people to make accurate budgets,” study co-author Ray Charles Howard, a professor at the University of Virginia’s Darden School of Business, said in a Darden newsletter last year. “You want them to set optimistically low budgets, because the lower the budget, the stricter that reference point becomes, and the more likely they are to reduce their spending, even though they’re almost certainly going to spend more money than they budgeted.”
Howard, who examined three spending categories — dining and drinking, groceries, and fuel — recommends that you aim to spend 20% to 25% less than you’re currently spending.
Let’s say someone typically spends $300 a month on groceries. Instead of setting a realistic budget of $280, they might set an ambitious budget of $240. Even if they end up spending $260, they’ve still cut back — and beat the realistic budget.
So what? When money is tight, look to cut back in areas where you’ve got some wiggle room. Aiming for a 20% to 25% reduction might sound high, but it’s worth experimenting with your targets. See which ones get you the best results. (SoFi members can use the free Relay tool to set targets and track spending right in the app.)
Maybe you want to put a sticky note somewhere obvious reminding you to try to get your $10 weekday lunch down to under $8. Even if you don’t always hit your goal, if you’re spending less, that’s progress. And as long as it’s motivating rather than discouraging, you’re building momentum.
Related Reading
• Americans Rebel Against Inflation and Overconsumption with ‘No Buy’ Challenges in 2025 (Fortune)
• When It Comes to Budgeting, What Do You Tell Yourself? (SoFi)
• How to Make a Budget in 5 Steps (SoFi)
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