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We always start a personal budget with the best of intentions. Normally the timing isn’t coincidental, usually around New Years or some other significant event, like the birth of a child or a job change. Out of the gate we have lots of enthusiasm and track EVERY expense in sight, until we wear thin and stop tracking expenses or even know what to do with the data we collect. Well, congratulations for the attempt! Now what do we do? Let’s first seek to understand, then chart a path forward.
Personal financial budgets are usually unsuccessful for three reasons:
The data is always looking backwards
Sure, having a look at the history pf our spending patterns is important to know what to focus on. But if that is all that you do then get ready to be disappointed. The objective of a personal financial budget needs to be proactive – changing our financial behaviors in a positive manner. Only looking backwards only reinforces our “not so smart” financial behaviors and increases our guilt. We need to take a snapshot of our most recent spending history and use that as a baseline to make critical and productive decisions about how we manage our cash flow going forward! My clients say, “I make good money, but I have no idea where it goes! There are always too many things to address by the time I get to the end of my paycheck”. Looking back is necessary, but more important is learning how to adapt going forward.
Personal financial budgets are too restrictive
Despite our best efforts at planning, life happens! We define our expense categories and make a solid estimate of spending for each category – then something happens during the month that we did not expect. Hate to break the news but more months than not you will experience an event that throws you for a loop. At this point most people say, “It’s too restrictive – I’m not enjoying life!” Our personal financial budget needs structure but also flexibility to adapt to current situations. Think of the process like a highway with three lanes. You normally feel comfortable driving in the middle lane and you know where the shoulders and guard rails are to keep you going in the right direction. But sometimes you must move to the left or rights lanes to avoid an incident or react to someone else’s distraction – heck you even have occasional off ramps in times of a crisis. Personal financial budgets need the same flexibility to change with conditions yet keep us going in the right direction.
Most budgeting apps are too automated
Growing up my mother used the envelope system for budgeting our meager family resources. Each paycheck she would go to the bank and get cash, and then divvy up the cash into the appropriate envelopes to make sure she had the money on hand to pay the bills when due. Along came electronic spreadsheets to make the task a bit easier and somewhat automated. Finally, the internet came along and today we have a plethora of free budgeting apps that claim to help us. So why don’t they work? I believe the apps have made it too easy for us – automatically downloading our transactions every day putting it out of site and out of mind. There is no connection between our current behaviors and the data – the data comes in and we collect it – with no real thought of how to use it to change our decisions and behaviors. What’s needed is a dose of the “old” and “new” – leveraging technology to help us make our daily expense decisions more thoughtful and efficient – and holding us accountable to the outcome.
So, what’s the solution? How do we reach the “holy grail” of personal financial budgeting? The solution is a three-step process that leverages technology to keep us aware and in control of our future financial patterns and behaviors while allowing reasonable flexibility to adapt to life’s surprises. Be sure to check back for Part 2 – the path forward!