I’m a big fan of budgets. And I don’t soften the blow by using the term “spending plan” either. I don’t disagree with the name “spending plan” because it is a plan to spend money. But to me that sounds like a trick. It’s a budget, let’s just call it what it is. I guess people get nervous when they hear the word “budget”. They think it means they have to say “No” to things. “It’s not in my budget.” That’s not necessarily the case. A budget is only as constricting as your paycheck. A budget is the first step to building wealth.
Why do you need a budget? To keep control over those dollars, of course! I don’t think you can have control over your money if you aren’t watching where it’s going. Your dollars are like unruly children. If you don’t keep them on a short leash who knows where they will end up!? You want to maximize your money. If you have to say “No” to something because it’s not in your budget it’s not because all of a sudden you can’t afford it. It’s because you’ve consciously decided that you would rather be rich than do that particular activity.
Sometimes people say they have a budget but they really don’t. What they do instead of budgeting is tracking. And tracking is good, you have to track. But the power of tracking your spending is amplified when you couple it with actual budgeting.
I hesitate to even call this budgeting. It’s more tracking. Retroactive Budgeting is when you sit down after the fact and find out where your money went. You aren’t planning ahead but you do know where you are spending your money. You might even fill in a spreadsheet with all your categories and amounts. That’s great. The benefit of retroactive budgeting is that you get to see where your money has been going. The drawback is that you can’t do much about it after the fact. Once it’s spent it’s spent. You can always try harder next month but you still won’t know til the month is over if you succeeded at your task.
Proactive Budgeting is when you decide where you are going to spend your money ahead of time. Then as the month moves along you make sure your money is behaving. At the end of each day you sit down and record your spending. When you budget proactively you can make tweaks and adjustments along the way. You always know where you stand. A proactive budget is a tool that you can use to help you make decisions. You will avoid costs, save money, spend wisely, and pay off debt quicker by using a budget.
A budget is a plan. Period. If it’s not a plan it’s not a budget. You are going to spend your money, you might as well spend it consciously.
Do you live on a budget? I’d love to hear the mechanisms of your budget. What do you do and how does it work?
9 thoughts on “Retroactive Budgeting vs. Proactive Budgeting”
As long as I meet my savings goals (which I do by sending the money directly to savings first, no passing “GO,” no collecting $200 :-)), then I only roughly divide the remainder into categories.
If I find that one category collects some additional money on a regular basis, I consider – and often do – send that extra to savings or reallocate it where it is needed more.
I started off by setting aside enough money in savings for all my yearly stuff: homeowner’s and auto insurance, yard and pool maintenance, property taxes, and other yearly fees, so that when those times come, I can just write the darn check and not worry about it. Additionally, many services charge only 11 months’ worth of fees if paid in advance, so that reduces the overall cost. Once the money is spent for the year, then I have to get busy and replenish it for the next year. Oh yes, if its possible to cash-flow any of these expense, I do, to whatever degree I can, thus reducing the pressure to save up the money again for the next year. But I didn’t start off that way. Getting there can be difficult….staying there can be a challenge, but it surely won’t get done without conscious effort!
I’m on the retroactive plan. I typically just look at my spending at the end of the month and then say “wtf am I spending on?!” But I do proactive stuff like automatically transfer money to my savings accounts and to pay off loans. I’d like to do more to prevent unnecessary spending ahead of time, but I’m always hesitant to cut back even further on things that I like doing, like going out with friends.
Those are some great points, and I agree with you. I like the last part about making the decisions and figuring consequences, too. Honestly, the other part is that I just haven’t spent the time to do proactive budgeting correctly. Unsurprisingly, I don’t enjoy staring at my spreadsheet. I think it would help greatly if I spent the time to do it, I just need to overcome the psychological barrier.
I view a budget as the structure to help you reach your financial goals. I do not use a budget per se, however I look at my expenses to make sure they are in line every month. I can do this because of a lot of years budgeting.
I do live on a budget, and after taking the course you are currently enrolled in I got a lot more serious about creating one that would keep me from blowing my old simple budgets. This included extra work of averaging my utility bills throughout the year, so I allow for the months that we use far more without breaking budgets at these points. I took my food bills and really looked at what I was putting out especially with those quick trips, then began stocking cupboards and planning ahead to prevent these extra trips as much as possible, because inevitably they’ll lead to extra items.
Using the envelope system forced me at first to really stay on budget, but honestly in time once I learned to stay on budget I returned to debit card.
I think the key thing has been to plan for the big hits that happen annually by having the funds set aside in my checking account for when the bill comes in, plus doing the same for things my family really likes to do. By planning the extra fun expenditures ( in our case it’s Disney passes) we are all more on board with keeping to the day to day stuff. And by setting aside for these over the course of the year I’m not tempted to add debt because funds are there. In any case it’s like sticking to a diet or exercise plan, you just have to make it a priority and then as time goes on it becomes a part of your lifestyle.
Jeff: I think you hit the nail on the head as to why people resist proactive budgeting. Planning your spending ahead of time doesn’t mean that you have to spend less on a certain activity unless you WANT it to mean that.
Let’s say you look back at your spending over the last 6 months and see that you spend on average $500 per month going out with friends and $100 a month clothing (just for examples). Then when you sit down at the beginning of the next month to make your proactive budget, just budget $500 for going out with friends and $100 on clothes. But let’s say that on th 25th a friend invites you out and you’ve already spent the whole $500 but you’ve only spent $50 on clothes, then move some of your clothing money over to going out. Not a big deal.
On the other hand, lets say that you had also spent your clothing money too. You can look at your budget and know that going out will mean that you can’t save as much as you wanted to and YOU decide to decline the offer. YOU make the decision, not the budget. Your budget just makes you aware of the consequences of your choices. Planning your choices ahead of time makes sure that you are spending your money the way you WANT it spent.
We call it spending plan 🙂 only because it really is a plan for us. Everything is automated, if we go over we won’t have money in the checking account (checking account gets the amount that is enough for us to live).
We started with a proactive plan and failed. I think it takes some back and forth between proactive and retroactive to find something that works for each person. It took us a little more than an year to get comfortable with everything automated and not go over.
We have been on a proactive spending plan (budget) for 4 years and life could not be any better. Sure, we get frustrated seeing things we really want NOW but can’t buy until the amount is saved…but it’s all worth it in the end.
We are slowly getting everything we ever wanted, month by month, without going into debt and while getting all those things are able to put away $700,- a month into savings on top of it all.
It’s a great feeling. Now let’s just hope the local bank doesn’t pull a ‘Cyprus’…LOL.
That was very scary when the government took that money in Cyprus. And it’s not just there. Countries all over the world are looking into that as an option and starting to open the door to that sort of thing. They even have a name for it now… “bail in”. Scary.