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?