Starting to use a budgeting system is like starting a diet or making a New Year’s resolution. Everyone starts out with great intentions, but not long after, most people are back to their old way of doing things.
- A better way to budget
- A better way to see where you spent your money
The Basic Budgeting System
Basic budgeting systems start by having you list all the potential categories where you will spend money during the month. Next, you budget (estimate) how much you will spend in each category. The final step is to painstakingly figure out how much you actually spent in each category and compare this to your budget.
Budget Templates, Apps, Envelopes, and Spreadsheets
There are many tools that supposedly try to make the budgeting process “easier” for you. They all try to make the budgeting process less burdensome. However, I have found that most individuals abandon using theses tools too at some point.
The Achilles Heal of Budgeting: Hypothetical vs. Actual
The real issue with most budgeting systems is that they don’t help you to control your spending. You can spend whatever you want in any category with no consequences. It isn’t until the end of the month when you compare your true spending to your budget that you find out that you totally outspent your budget.
The Alternative: Actual vs. Actual
For over 20 years, I have personally used My Cash Flow System to budget and control my spending. The cash flow method involves transferring money that you anticipate spending, for specific categories, into a separate bank account. Your monthly spending for these categories is then limited to the balance in this account. Next, during My Monthly Closing Process you compare actual inflows and outflows from this account to see how much you really did against your budget. Think of this method as the Envelope Budget but on a much grander scale.